What’s the value of high and low interest rates? The answer is not much when you factor in the points paid to enjoy a lower rate. The lesson here is to do the analysis all the way to the end.

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Transcript:   I have gotten more free drinks and dinners based on the value of interest rates in almost any bet I’ve made. I got into this conversation one time with my favorite Texas lender and we were talking about the difference of and the decision made because of the difference in interest rate options when purchasing an investment property. My people are mostly purchasing one, one to four unit residential income properties. Do they pay 4.75 and point plus whatever or do they pay a quarter point or no points but pay a higher interest rate save five. They don’t know what to do because they hate the fact that they could get four and three quarters which is under five, which is pretty sexy these days. On the other hand that extra point on the property they bought is two or three grand. What to do? Let me make it easy for you. I’m going to tell you why in second but the short answer is take the higher interest rate, keep the two or three grand in your Levi’s. It’s just not worth it, here’s why. Take John and Steve, they buy a couple of duplexes for $290,000 apiece. Floor plan is the same, they’re next door to each other, they we both finished the same day. There’s nothing different about these, they’re clones. They put the exact amount down 25% that means they got the same amount of loan. One of them gets a 4.6% loan, that’s John. Steve got a 5% loan. They’re both going to add a thousand dollars a month to their required loan payment because part of their plan is for them to end up with this property free and clear. Not that they would retire owning at that way but once you get a property for in clear if that’s the best thing to do, sometimes it’s not, usually it’s okay to do that. Now you have more options because you have a free and clear property, right? The investor with the most options almost wins every time. Here is what happens. Let’s take a look at what happens over x amount of time with both of them adding a thousand dollar to the payment but John has four tenths of a point less in interest, then Steve What happens is whether it’s four years, five years, seven years, however many year you want to do almost always usually it’s four to 10. I can do this all day and you can buy me my 18 year old MaCallan all day. Here’s the deal. The difference in amount owed is one month or no months in time passing. It doesn’t seem on the surface that it should be that way but I’m telling you it is. Yet even though John got there the same speed as Steve did, Steve has two or 3,000 in his pocket, John doesn’t have. John’s never getting that money back because as you can see it didn’t make any difference, it just didn’t. The case is where it does make a difference over the long haul for the lines to cross on the chart and it usually has to be so long that it just doesn’t matter. Then you get into the future value of money and then you … And you work your way back and you go, “That really was a whole lot of math for not much return.” Just remember if you forget everything I said today take the higher interest rate, don’t pay the extra fees.