Why not "pay down" interest rate for cash flow?

Question

The 7% interest rate I'm seeing, even with a 30% down payment, credit score 810, is really gobbling up cash flow. The most frequent advice I get is to bite the bullet and refi when rate goes down. But will it go below 6.5??? I do have cash for squeezing down the rate. There are incontrovertible reasons why I would like to see cash flow from my next SFR -- and, we had a tax hike which also reduces cash flow. Not to mention way higher Homeowners due to increased RE values.

Any lenders out there who might have some interesting ideas please post your contact info.

How many of you vote for sitting out till the possibility of CF from LTR is more real? What other ways are there to make my $$$ work?

Any lenders out there who might have some interesting ideas please post your contact info.

How many of you vote for sitting out till the possibility of CF from LTR is more real? What other ways are there to make my $$$ work?

Nate Herndon · Answer

@Jane S. Interest only payments are likely your best bet at finding better cash-flow right now. Rates are bumping up-up-up each week, unfortunately.

In regards to your question about buying the rate down, I like to break it out into your 'break-even period' to visualize how long it will take to recoup your funds paid upfront. Here is an example scenario for a rate buydown:

- $200,000 purchase- $160,000 loan (20% down payment)- 8.50% par rate = $1230.26 monthly payment- Current buydown ratio is about 4:1, or 1% fee for 0.25% off of rate- Max rate buydown to 7.50% costs 4% fee (or $6400)- $160,000 loan @ 7.5% = $1118.74 monthly payment$1230.26 - $1118.74 = $111.52 extra cash each month$6400 buydown / $111.52 = 57.38 months57 months or 4.78 years until you recoup your $6400 paid upfront.

Now this ignores the fact that you are paying a lower interest rate and putting more money towards principal during those 4.78 years, but if cash in hand is most important to you, it is going to take approx. 5 years to get your $6400 rate buydown back.

Richard Elvin · Answer

Adding to what @Nate Herndon said, consider the opportunity cost of tying up $6,400 for five years. At current, ~5% , savings rates if you would have $8,168 if you let the $6,400 sit in a high yield savings account for five years.

Kevin Martini · Answer

This reminds me of a chat I had with a family just a few days ago. For some context, I believe that mortgage rates operate in cycles. So, it's not a question of 'if' but rather 'when' they will decrease. Here's an interesting tidbit: in the recent history of the U.S., we've experienced 6 recessions. During these times, mortgage rates typically drop by more than 2% from their highest to lowest point. In line with this, the Mortgage Bankers Association's latest predictions suggest that by 2025, rates might begin with a 5.

With this said, buying points on a mortgage transaction to permanently buy the rate down is like putting brand-new tires on a car the day you trade it in.

Andrew Postell · Answer

@Jane S. I would HIGHLY advise against buying down any rates.  Buy downs make lenders money.  Unless that payback is UNDER 2 years I would recommend to not buydown anything.  Read this post I wrote on this topic HERE.

Wyatt Wolff · Answer

Strongly agree with these guys. Don't tie up the capital if you don't have to. If 100 something in extra cashflow will kill your deal, consider finding a new deal. Not worth the risk. I/O is also a good option

Becca F. · Answer

@Jane S.

This is a great question. I was in escrow on a previous property at 8.624% conventional with 20% down and 2% points - the deal didn't go through (related to inspection issues). I'm looking at other properties in Indianapolis using this interest rate and I will be negative cash flow ranging from -$50 (if there are no repairs and nothing goes wrong) to over -$100. The negative cash flow is even worse in California or Nevada. I don't want to put more than 20% down because that's tying up more money for me. Then the "refinance when the rates are lower strategy", it costs to refinance and when would I refinance, when I can get 7% or lower if I'm at 8.6%? I talked to another lender and I don't want to do any 5 year adjustable rate mortgages in 7% range because what if the rates don't go down.

I've thought about buying down the rate by asking seller for help with closing costs to do this. Or look at syndications 6% to 8% (public debt fund with one organization) which has a slightly better return than a HYSA? Or not buy anything for a while?

Matthew Paul · Answer

I wouldnt pay it down . I would simply raise the rent .

Shawn Krieger · Answer

well said

Devin Peterson · Answer

I would explore interest only payments options. You have 5, 7, 10 year I/O options available to you. You can also do a 3-2-1 buy down with a seller credit with DSCR. Keep in mind if the goal is to refinance in the near future I wouldn’t go beyond 3YR PPP. Good luck!

Why not "pay down" interest rate for cash flow?

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