When financing an investment property to keep in your portfolio your quest for the ideal mortgage begins. You want to keep your costs as low as possible to obtain your loan but you also want the lowest rate for the best cash flow. It can be a moving target choosing between a 15, 20 or a 30 year fixed rate loan.

The shorter the term, the higher the payment and the longer the term, the lower the payment. And your choice isn’t just about the loan term but whether or not you should pay discount points and if so, how many. What are discount points?

A discount point, commonly referred to as a “point” is expressed as a percentage of the amount borrowed and is used to discount, or lower, the interest rate on a mortgage. Every loan program offers multiple interest rate offerings based upon the number of points paid. The more points paid, the lower the rate. Yet if everyone wants the lowest rate, then shouldn’t everyone also pay a bunch of points? Maybe, maybe not but you do need to perform a little math with your loan officer.

First, lenders really don’t care if you pay points or not. Points are a form of prepaid interest to the lender and as such potentially tax deductible for those who itemize. A lender can accept a point upfront and lower your rate. Or you can elect to pay no points at all and your rate will be higher.

For instance, say you’re financing your duplex and borrowing $200,000 on a 30 year loan. Your loan officer quotes a rate of 4.875 percent with no points and 4.625 percent with one point. The monthly payments are $1,587 and $1,542 respectively. The difference is $45 per month but your point cost you $2,000. If you divide $2,000 by the $45 monthly savings, your “payback” period is just over 44 months. As long as you plan to hold the property for at least that period of time, perhaps a discount point is in your future. If you feel the savings aren’t enough to justify the $2,000 additional cash outlay, maybe a new washer and dryer for the utility room is a better choice.