Real estate investors often wonder whether it is better to put 15% down or 20% down when buying an investment property. The answer is not straightforward, and it depends on several factors, including the current mortgage interest rates, loan products, and the investor’s financial goals. In this blog post, we will explore the Loan Comparison Spreadsheet and how it can help you make an informed decision about your down payment.
Using the Loan Comparison Spreadsheet
The Loan Comparison Spreadsheet is a tool that allows investors to call up their lender, get the current mortgage interest rates for a variety of loan products, and then see the difference in monthly payment. This tool helps investors analyze the same property and make a decision about which loan to get and how much better that one is than another.
To use the Loan Comparison Spreadsheet, investors need to call up their lender and get the exact mortgage interest rates for the different loan programs. The spreadsheet shows all the different government loan programs, the conventional owner-occupant loan programs, and the conventional investment property loans. Investors can choose between 15%, 20%, 25%, 30%, and 40% down payment options.
The Difference between 15% and 20% Down Payment
The most common question that investors ask is whether they should put 15% or 20% down when buying a rental property. When you get a 15% down loan, you also have private mortgage insurance (PMI). PMI is insurance that you pay to the lender to protect them in case you default on your mortgage. If you put 20% down, you no longer have PMI.
The difference in the monthly payment for a 15% down payment and a 20% down payment is significant. For example, on the day I got quotes from my lender… if you were to buy a $450,000 for a rental property, the difference in cash flow between 15% down and 20% down is $326 a month. That’s a big difference. If you annualize that and multiply by 12, you get $3,912 per year. So, for the extra $22,500 (which is 5% of the purchase price), you earn $3,912 per year more, which is a 17.39% return on the extra down payment.
Calculate It Yourself
Your numbers will be different when you call your lender.
Here’s how to calculate this yourself:
- Get mortgage interest rates (and PMI) quotes from your lender and fill in the Loan Comparison Spreadsheet
- Take the difference in monthly payment between the two loan programs you’re comparing.
- Multiply by the difference by 12 to get an annual amount.
- Divide the annual difference in cash flow by the difference in down payment between the two options you’re considering.
- This will give you the extra return you’re earning per year on the extra down payment that you’re considering.
- Compare that return to other investments you could make to determine if this is a worthwhile investment for you to make.
Analyze Your Deal
If you want to fully analyze your deal, consider using our other free spreadsheet: The World’s Greatest Real Estate Deal Analysis Spreadsheet™ to fully analyze your deal.
In conclusion, whether you should put 15% or 20% down when buying an investment property depends on several factors, including mortgage interest rates, loan products, and your financial goals. The Loan Comparison Spreadsheet is a useful tool that can help you compare and see the difference between one loan product and another.
It’s not just about borrowing. Putting more down tends to also improve your interest rate and can, in some cases, eliminate PMI. You can determine the difference in payments to estimate the difference in cash flow. Since the income is going to be the same if you’re analyzing the same property, you divide that difference in annual cash flow by any extra you had to put down to estimate the extra return in cash flow that you’re earning on that extra down payment.
In the end, you have to decide whether it is worthwhile for you to put this extra money down. Run the math and say, this is what my payment is at 15%, and this is what it is at 20%. This is how much extra I had to put down and figure out what the difference is. Then, figure out what the return is on that extra 5% down to see if it’s worthwhile for you.
Remember, every investor’s situation is unique, and what works for one may not work for another. Use the Loan Comparison Spreadsheet and do your math to make an informed decision about your down payment.