Any better scenario to pull out money that I am overlooking?

Question

Chris Mason · Answer

FYI: FHA mortgage insurance is 0.85% per year, calculated more or less identically to interest. And, like interest, it is there for the life of the loan. Your real interest rate is 3.375% + 0.85% = 4.225%.

Nick G. · Answer

@Benjamin E. 5% down on an FHA loan? That's unusual.

Anyhow, I don't know anything for sure because I don't have enough information, and I'm not even entirely sure what your goal is - do you want out of PMI, do you want to pull $100,000 out, or both, or? - but let's look at the facts:

Your PMI is $275/mo.

We also know that every $100,000 you borrow will cost you around $300/mo.

You can also project that a 1% increase in your rate could result in a payment increase of, maybe, $100/month.

1. If you refi and dump PMI, you will save $275/mo, but lose ~$100/mo due to the rate increase. Profit: $175/mo.

2. If you do a cash-out refi and pull out $100,000, you'll pay another $300/month, but the money you make off of $100,000 once wisely reinvested should more than compensate for that (and this is the most classic way of growing wealth in RE.)

3. If you found a loan that would allow you to do both, as I have for my property, you would be able to have your cake and eat it too.

Here, maybe this will be interesting/helpful to you - I am currently working on doing this right now with my own property, which happens to have a nearly identical loan amount as yours, and there is $50,000 in equity I could refi out. Let me share with you the scenario came up with, as emailed to (and approved by) my lender just yesterday. Her comments back to me are in bold italics.

I owe $405,000 on my house at 3.75%. Right now it would easily appraise for $510,000. I want to dump my PMI now that I have 20% equity in the property, but I am interested in doing something more creative than the classic 80% LTV refi.Let's say I continue living in the house, and my lender gets me into an 80/10/10 refi to dump PMI (+$290/mo) and refi out the 10% as cash to me. Payment on that 10% [$51,000] is probably $325/mo. The rate on the 2nd is 1.99 over prime so it is currently 6.24%.  The interest only payment is $260.00, so at $325 you are paying back the principal which is a good thing.The way I see it, by doing an 80/10/10 at 4.5%, my net outgo might go up roughly $200/mo, but I'd have $50,000 to use toward another rental. that rate is perfect as of right now.I find a $200,000 house in Palmdale that I would like to buy as a rental with $50,000 down. With that 25% down at 4.4%, my P&I on that $150,000 is probably $750/mo. The rate today on this scenario is 4.625%, which makes the payment $771.21, but not a huge difference.Taxes ($210/mo @1.25%) and insurance ($90/mo) are an additional $300/mo. Total debt to qualify for on this property is $1050/mo.Total payment with the higher rate is $1071Palmdale house rents for $1,400/mo. My income can be credited with 75% of the property's rent, or $1050/mo. Based on the higher rate you are negative $21 a month but that is very minor.Maybe I'm way off here, but it seems to me that for $200/mo and no additional debt:income requirements beyond affording my primary residence at the higher payment, I just bought a rental in Palmdale. Agreed.

I owe $405,000 on my house at 3.75%. Right now it would easily appraise for $510,000. I want to dump my PMI now that I have 20% equity in the property, but I am interested in doing something more creative than the classic 80% LTV refi.

Let's say I continue living in the house, and my lender gets me into an 80/10/10 refi to dump PMI (+$290/mo) and refi out the 10% as cash to me. Payment on that 10% [$51,000] is probably $325/mo. The rate on the 2nd is 1.99 over prime so it is currently 6.24%.  The interest only payment is $260.00, so at $325 you are paying back the principal which is a good thing.

The way I see it, by doing an 80/10/10 at 4.5%, my net outgo might go up roughly $200/mo, but I'd have $50,000 to use toward another rental. that rate is perfect as of right now.

I find a $200,000 house in Palmdale that I would like to buy as a rental with $50,000 down. With that 25% down at 4.4%, my P&I on that $150,000 is probably $750/mo. The rate today on this scenario is 4.625%, which makes the payment $771.21, but not a huge difference.

Taxes ($210/mo @1.25%) and insurance ($90/mo) are an additional $300/mo. Total debt to qualify for on this property is $1050/mo.Total payment with the higher rate is $1071

Palmdale house rents for $1,400/mo. My income can be credited with 75% of the property's rent, or $1050/mo. Based on the higher rate you are negative $21 a month but that is very minor.

Maybe I'm way off here, but it seems to me that for $200/mo and no additional debt:income requirements beyond affording my primary residence at the higher payment, I just bought a rental in Palmdale. Agreed.

Chris Mason · Answer

Good question. That's exactly why I say "more or less" next to the word "identically." PMI is always tied to original loan balance, unlike interest which is tied to current loan balance.

Troy H. · Answer

So does this mean that your PMI decreases over time as you pay down the mortgage?

Michael Facchini · Answer

Ben, there seems to be a couple goals here, but eliminating PMI would be the first one I suggest attacking.  If you bought the place for $415k with 3.5% down, I assume your balance currently stands around $400k...maybe a few bucks less.  So, you'd need the value to be around $500k or so in order to eliminate PMI and go conventional.  While the rate will go up around a half a point, give or take, you'll still save $125 to $150 per month (depending on the particulars).  So, you start there.  Then, if you're interested in investing in more property, you either tackle pulling cash-out down the road via a HELOC, or you can consider cash-out now if you're very focused on making a move on something...and in the near future.  To Nick's point, you'd need to find something that is exceeding your cost on those dollars (but don't forget to look at the tax benefits, equity gained via normal principal payments and possible appreciation).  Point is, there are two possible goals here, but avoiding PMI is a no brainer and you should at least start there.  If you don't have another investment objective in mind, you might want to start with the refi/PMI elimination and then circle back down the road with a HELOC to use on another purchase.  That's my 2 cents at least....

Benjamin E. · Answer

Nick! I appreciate the well put together answer. So I meant to say 3.5 percent down on the FHA loan. And I really do like your suggestion. Going to shop around and see what some bankers can do for me. I am really wanting to make as much monthly as possible, but agree that if I can get 100k or even more for $300-$400 a month then I can possibly turn that into something nice on more place. Prices on multi units on the north side of Chicago are making it tough to find a place that I can buy and make $1000 or so in positive cash flow on, but maybe I need to look harder or at other types of properties. Also not against doing anothet rehab, heck - I would consider another FHA loan at 3.5 percent down.

Nick G. · Answer

Hi @Benjamin E.. The most obvious answer is to wait until you have 80% LTV on the subject property, then refi out of PMI. In other words, if you believe the building will appraise for $650,000, you'll need $520,000 of equity for the classic refi to dump your PMI.

Less obvious solutions involve 90% LTV loans with no PMI (though the rate is usually a bit higher, it still results in big savings compared to FHA PMI,) or an 80/10/10 loan, which is similar to the first option but involves a second loan (which could also even be cash out.) Both of these are generally only for owner-occupied properties, though 15% down investor loans are offered by some portfolio lenders from what I've heard.

I'm not a lender, so you'll want to defer to one for specifics, but those are options you should at least know about. Oh, and if it makes you feel any better, FHA PMI on your loan actually can come off... but it's not automatic, and it's only after 11 darn years on top of the 80% LTV. Lol.

Troy H. · Answer

@Chris Mason Wow. All the more reason to refi out of it asap. Thanks.

Michael Facchini · Answer

I'd have to know all of the particulars to be more specific, but the rates you're quoting seem to be a bit on the high side.

Benjamin E. · Answer

Thanks so much. I feel like I must be missing something or explained something incorrectly because I am not able to match up the benefit of a refi. If my rate goes up one percent, my payment (including closing cost refi fees) will go up about 350 or 400. The PMI is about 275, so wouldn't this actually end up costing me more, ever so slightly? Now, if I did a cash out refi, my payment would go up but at least I would have some money to invest. Seems like the best thing would be to leave the loan as is for now (that rate just can't be beat) and simply do another HELOC. By another I mean that I have one already on my first property. Used 100k of it to do repairs a d for dp on this three flat. So the "another" would be against the rehabbed three flat. Looking like I can get between 150-250k at either an 80 or 90 percent LTV, with the rate being 4.5 on an 80 and around a 5.5 on the 90. Thought would be to find a place that would cover the payment on this HELOC, provide me with another 500-1000 a month, and own another asset with tenants paying it down. Not going to be easy to find and will probably need to find a place in need of repairs, but that is all that I can think of. Thoughts? Thanks all for such great feedback, you all rock!

Any better scenario to pull out money that I am overlooking?

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