Should I pay to get lower lender/origination fee for mortgage or not?

[Polak_maly]

I was given the following three mortgage options for 2-unit house worth ~$400k in high cost living area. I will be living in one unit, and I will be renting out 2nd unit (which will cover mortgage/insurance/taxes before income rent taxes. So the monthly payment will be ~1.9k, and I will be renting it out for ~2k [taking conservative guesstimate on rent, likely it will be more]). I'm in 25% tax bracket, 26 years old, and I intend to max out 401k and Roth IRA annually.

The mortgage I will be taking out is $299,200. Options given to me are:

Option 1:  4.25% with a small lender/origination fee of $299.20
Option 2: 4.375% with $0 fees and a credit at closing of (-)$1,340.40
Option 3:  4.5% with $0 fees and a credit at closing of (-)$3,554.50

I do intend to start pre-paying somewhere between $200-500/month right away (maybe more), and intend to stay in that house until paid of.

Which option would you recommend, and why?

[waltworks]

Time to make friends with an amortization schedule. They are available online, just google it up.

You want to figure out how long you'll be paying on the note, and then you can figure out if that $3k is worth it or not.

Oh, what the heck.

So, with a $300k mortgage, monthly payment (just P&I, which is all we care about here) is:
$1472 @ 4.25%
$1494 @ 4.375%
$1516 @ 4.5%

The 4.375% loan will gain you an extra $1640. Divide by that $22/mo and you get a payback time of 74 months. The 4.5% loan will gain you $3855. Divide by $44/mo and payback is 87 months.

So if you are planning to pay off the entire loan faster than 6 years, take the money and run. If you are positive you'll stay in the house and it'll take longer than that, pay extra for the lower rate. At an extra $500/mo, you'll be paying off in 216 months, so the lower rate/higher closing cost makes sense. To get down to <74 months, you'd need to be paying somewhere around $4700/mo (an extra $3200 or so).

-W

[hodedofome]

Because the future is not for certain, having a lower payment is always nice. You might expect to pay it off sooner, but life happens and you could easily end up having less $$ to pay it down as quick as you had hoped. IMO first thinking about the risk, and then the return second, is the way to go.

[Cheddar Stacker]

All good points from Walt. Said another way: $300K x 0.25% equals $750. Obviously this difference will decrease along with your mortgage, but for simplicity let's assume it will stay at $750. That will take you about 5 years (750*5=$3,750) to recover those fees.

Walt's numbers are more accurate, my example might be simpler to understand.

If it were me, I would take the lowest rate possible (so pay the fees) and I would not prepay the mortgage too fast as it's a low fixed rate and you will likely be better served to invest that extra $200-500/month. Also, your renter will cover the mortgage, so as long as you keep it rented the mortgage will continually decline without any capital from you.