Is this a good loan for excellent credit?

Question

Hello BP family,

I'll be quick, just checking to see if this loan is decent or not...

Property type - Investment

Amount - $165K

Down Payment - 20%

Credit - 760 and above

Rate - 5.375% (30 yr fixed)

Origination Charges - $2215

Discount Points .5% - $660 (I'm not sure what this is about)

Appraisal - $405

Title Fees - $1000

Owner's Title Insurance (optional) - $400

I guess my main question is the 5.375% rate. Is that normal for an investment property at today's rates?

Thanks!

Curtis

Cameron McCown · Answer

@Curtis H. Nope!  For a 760 credit score on investment property, you should be looking at 4.625%-4.75% with 20% down on 30-year fixed.  Origination charges $800 with no discount points.  A discount point is an amount a traditional lender uses to buy down your rate (a bit funny here, since your rate is 5.375% WITH the points).

Chet Hileman · Answer

Hey Curtis! I'm a lender in MO/IL/CA/FL. Most of my business is in the STL Metro area and I work with a large number of clients who are buying investment properties in the STL area. We're a mortgage bank and offer private loans, non-QM and the average Fannie/Freddie which is sounds like that's what you've been looking at. In general I typically tell my clients if they want a general rule of thumb that investment rates are about 1% higher than your average primary residence loan. So if you're at 4.375% on a primary you shouldn't be shocked to be at 5.375%. Many mentioned the size of the loan as a factor which is a massive factor that many clients don't think about when we talk rate. You might be at 5.125% on a 30 year fixed for a $200k loan, but if the loan is $50k there is hardly any profit in the loan therefore the rate is higher from the top down to try to create some revenue on the loan. However, if you look at the total interest payback over 30 years on a $60k loan b/w 6% and 5% you'll be surprised at how little that costs you and as someone mentioned, you won't have this for 30 years. I would counter the idea of shorter terms, that will not yield you positive results on Fannie/Freddie products so i typically tell my clients to pay loans off as quickly as they want to, make a 15 year payment but use the advantages of the 30 year amort. You also don't want to tie up your DTI on a lot of 15 year mortgages and hold yourself hostage from future purchases. I would steer clear of the big bank in general, they typically are not investor friendly from what I've seen since my time entering the business in 2006. I hope this helps, all the best!

Chris Mason · Answer

Part of it is market competition, part of it is genuine risk, part of it is average loan amount size.

Curtis H. · Answer

@Jason D.

I never thought about that option, but even though I do plan on keeping this a long time it may be something to consider. It would keep payments low and cash flow higher the first 7-10 years and I can just dump more money into the principal pay down. In 10 years the loan amount would be so low it doesn’t matter if interest rates are a few points higher I suppose.

@Thomas S.

Starting a good relationship with a broker may not be a bad idea. I just don’t have a lot of time since I’m already under contract and didn’t think someone I already did a loan with would give me such crappy numbers.

Thomas S. · Answer

Take your business to a broker. If you do not have a established strong relationship with a particular bank you are wasting your time doing your own shopping. Get a good mortgage broker on your team.

Thomas S. · Answer

@Curtis H.

"I can just dump more money into the principal pay down."

Principal pay dawn is where money goes to die. Often very difficult to access and can vanish quickly with a market downturn. Investors should place a higher value on their cash than a savings of 5% on a mortgage interest rate.

Dead equity should be valued as a investment. At 10% return on cash this means you should be deducting $833/month off of your rental income first for ever 100K in dead equity in a property. It is easy to see that dead equity will push any property into negative cash flow very quickly.

If a investor places a very low value on their cash and has no use for it the only problem with parking it in real estate is that it is at risk in a market down turn. Ideally a investor would choose to invest cash as opposed to hoarding cash.

Taylor Chiu · Answer

Seems high to me as well, you should be able to find something in the 4's.

Chet Hileman · Answer

My pleasure! I would also say that investors by nature are cost sensitive and are always trying to save as much as possible and I totally understand that. What I've found in my life is cheap doesn't always equate to good. Sometimes when a lender is so far priced under the market it's b/c they have an inefficiency somewhere and they've using a rock bottom price to make up for it. Or they're cut corners and have processing or underwriting in a different country, therefore losing control of the process. My pricing is super competitive but I don't ever desire to be the cheapest guy on the street b/c I value what I offer my clients and the boots on the ground that I have here in my area.  Cheers, and happy investing!

Curtis H. · Answer

@Chet Hileman

Thanks for the input my man!

Curtis H. · Answer

@Chris Mason

What I have discovered thus far is that the mortgage rate from one state to the next. I didn't know that was a thing. So if my property were in Missouri, it would be a half a point less than in Atlanta. Why is that?

Is this a good loan for excellent credit?

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