When financing residential rental properties in Chicago, those with four or less attached units, most every mortgage company and bank will have an option. Such financing is issued using guidelines set forth by Fannie Mae and Freddie Mac.

For those who flip properties, financing costs are important but less critical compared to someone buying and financing a rental unit for the long haul. Making a mistake in choosing the right loan program will last as long as the loan exists. What type of long-term financing should you consider?

The best options as it relates to a lower rate means putting down at least 25% of the sales price of the unit although you can put down 20% in exchange for a slightly higher interest rate. But along with that interest rate is a combination of points and fees. Say that you select a 30 year fixed rate program. The longer the term, the lower the rate meaning greater monthly cash flow for you. A shorter term loan will have a lower rate yet the payments will be a bit higher. The tradeoff is the lower amount of long-term interest paid.

Once you select the term the bank will give you some options regarding rates and points. Each loan program has a set of interest rates available for borrowers and an accompanying set of discount points. For example, using a 30 year fixed rate of say 3.75% without any points would provide a higher monthly payment than paying one point and getting a long term rate of 3.50%. One point is equal to one percent of the amount borrowed. You will also have the option of actually increasing your rate by 0.25% in exchange for a lender credit toward your closing costs at the settlement table. The tradeoff in this scenario of a higher rate means less cost to you but also a higher interest rate, shrinking your cash flow.