To PMI or NOT to PMI?

Question

Trying to acquire a house for rental purposes, long term strategy is to rapidly build a rental porfolio

Purhcase Price is about $55,000 two financing options available:

1. 90% loan which will be at %7.25 interest and tie up $5500 down payment..will also cost and additional $468 in private mortgage insurance(PMI).

2. 80% loan, @ %7 interest, will tie up $11,000 down payment, but will save the PMI ($468 a year) and a %0.25 in interest and ofcourse financing less which will lead lesser payments and lower interest paid.. the total savings of interest saved, PMI, and cost of barrowed less funds will come out to about $90 a month which is about $1080 a year savings over finance plan #1..

which way is better to go? doesn't make sense to save the $1080 by paying an additional $5500 upfront (thats 20% return vs a 5% I would get from interest earned on a $5500 siting in the bank, so I am ahead 15% a year)..

lets assume I will have enough funds to keep with the possible business pace to rapidly build my porfolio of rentals...

please experts ...help me out.

Thank You

Calixto Urdiales · Answer

You make a very good point but you might want to check with the lender before making any decsions! Also you would have to consult with a seasoned investor in your area that knows the market really well to see if that you be in your best interest. In my opinion I would say to put the extra money down but real investors aren't born there made by their decision making so it all comes down to what you want!

John J. · Answer

As of this year I think PMI will be tax deductible and also if your in an appreciating market you can take the PMI and if the value of the house goes up to where you have 20% equity you can get rid of the PMI after 2 years.

N/A N/A · Answer

Great Feedback everybody..thank you...this forum is awsome.

allcash, I like that, I am usually the aggresive type and that sometimes can turn into Greed..and the fact that I would actually tie up more of free cash that will slow me down..is a value in itself...this is the way I feel about it ....unnecessary expense that could be eliminated.

The tax deduction is a very good point that had not took in account.

I am in it for the long run...I had flipped 3 houses in the past with couple of other partners, and I may continue to do so (different line, whole different strategy..... cash really is king when it come to that...if you have it ofcourse!)

but this is a long term for me and my wife, and my wife is against the flipping thing anyways for our own deals..which keeps me grounded and focused when the eagerly part of me say emmmm..what if ...

I am in kansas, which as you all know is a steady market... appreciaction is 3% on average on house like that...5% in a very good year... but I feel is a fair deal ..since I am paying $54,720 + 2% concessions from seller and with 2 to 3K in repair expenses a minimum fair market value would be $65....could really be listed for $69K and sold quickly.

I guess the only thing that bothers me. is the Cash on Cash calculation and RoR...I was given the impression from a lender that I could get a 100% loan a couple of weeks ago.... which turned to be b.s. as you all know for investment property this a thing of the past (maybe couple a month ago was available).... I guess I always like one extreme or another... either 100% loan minimize cash out of pocket and create less but positive decent net income...or pay 20% and minimize expenses and maximize monthly net income.... does this make sense or am I being silly!!

Calixto Urdiales · Answer

In this case it would not be to your best interest to think about getting the PMI removed after two years. Cause not only will you have to wait two years to remove it but you would have to wait for the market to build that beautiful thing we like to call apperciation! So like I said before I would have to agree with all cash and tell you to take the route with no PMI. Thanks for your time and have a wonderful biggerpockets day!!

N/A N/A · Answer

I plan to hold into the property for long term...at least 5 years maybe even longer...

every $ hurts out of pocket :) lol, however I guess, the extra money will not strap me for cash but thereotically I will be able to acquire less propeprties with my available funds, theroicatically in the operative word, becuase practically I will need at least 3 to 4 month between each acquistion to do it right (find a deal, close , fix it a bit and rent it out)..

Calixto Urdiales · Answer

And this is the reason being why I asked you what you planned to do with the property. If you are staying in the property for more than five years as you said you are then it will pay for itself in the long run and then some! I would like to know what you are going to do and if you think you made the right decision!

Frank Adams · Answer

Pay the extra down! You're eliminating an unnecessary expense. It's cheaper than the longer term plan of paying down the mortgage and then trying to get the PMI eliminated. So what if it takes you a bit longer to get that next property. By waiting longer to rebuild your reserves you're less likely to suffer from "gottadoadealitis".

good luck

all cash

Calixto Urdiales · Answer

How long do you plan to stay in the property and do you have more funds to fall back on? (in essence if you were to put the extra $5500 down would it hurt your pocket book?) Thanks for you time and I can't wait to hear form you again!