Should I look to refinance?

Question

Let me start by saying that I'll have owned this home for 2 years in December, so this may be a little early to be discussing this. Just trying to get a sense for what I should do when the time is right.

I purchased a duplex in December of 2014 with an FHA loan. My credit is lovely (thanks responsible self), so I was able to qualify for the lowest interest rate possible.

Fast forward to today and I make a higher salary, have a tenant, and have about $20K equity into the property.

I receive about a letter a day asking me to refinance, but I'm very skeptical these are legit. My goals right now are to get rid of my PMI and if a lower rate is out there, get it.

Thoughts?

Cosmo Iannopollo · Answer

@Chad Olsen Chris Mason Thanks for all the replies. Great information and I'm researching more about it now. Just for further info, my current mortgage with taxes, insurance, and PMI is a shade over $1600/mo. My rent for the first unit is $1200/mo. When I move, I'll be able to rent this second unit for another $1200 (possibly more should the market dictate as much). On top of that, I'm expecting to be out of the PMI, which will reduce my mortgage payment by about $200. This thing could be cashflow positive to the tune of about $1K/mo.

Chris Mason · Answer

Your current effective interest rate is 3.625% + FHA MI Rate. December 2014 probably means that your FHA MI rate is 1.3% or more. 3.625 + 1.3 = 4.925%.My memory isn't perfect and FHA MI changed right around Jan 2015... to figure out your FHA MI rate, multiply the monthly MI payment by 12 and divide by original loan amount (see, mortgage math isn't so mysterious after all is it?).Yes, any decent loan originator can run the math you're asking for and let you know how that would work out. Refinancing to drop mortgage insurance with a plan to keep paying what you are paying now with 100% of the extra applied towards principal reduction, is an absolutely excellent plan. And right now rates are still a little low because of Brexit, so it would in fact be a good time.Earlier you spoke about all the garbage you get in the mail; yup you can toss that out. Pick a lender local to you that you have some reason to believe is competent. Maybe they did your purchase mortgage and treated you well. Maybe a business partner really likes her lender. Etc.

Thomas S. · Answer

Pull out every dollar you can when you can assuming you have invested in a property that will cash flow with a 100% financing calculation. If a property does not cash flow based on calculations with 100% financing it is not a good investment property.

Cosmo Iannopollo · Answer

Thanks for the reply Thomas S.

Russ Allen · Answer

@Cosmo Iannopollo I would simply call up my mortgage lender and ask if you qualify to waive PMI. I did this recently for my primary residence (FHA mortgage) and am awaiting their deliberation (they said I would receive notification by mail in 7-10 business days). I have less than 20% equity currently. You indicate you have $20K equity but not sure where you are as a percentage of total appraised value.I agree with @Moises Carlos that refinancing to a conventional might be a good choice so that you can put the FHA back into your "toolbox". You can only have 1 FHA mortgage at a time and must live there for 12 months.

Moises Carlos · Answer

You should look at refinancing before you move out because primary residences get lower rates than investment properties. Your rate is the base rate plus what you pay in MI. FHA does not allow MI to go away if you put less than 10% down when you purchased and I believe this rule was in effect when you bought the property. If you have 20% equity now, look to refinance into a conventional loan with no MI. The rate may be a little higher but loosing the MI will make it worth it.

Dan Schwartz · Answer

Greg S. In all of your posts about "dead money," this statement of yours finally clarifies to me what you mean: "If a property does not cash flow based on calculations with 100% financing it is not a good investment property." Now, do you account for vacancy and repairs when you do this calculation on your own properties, or simply PITI and HOA (if applicable)? Very interesting.

Chad Olsen · Answer

@Cosmo Iannopollo The first thing I would suggest is getting rid of the PMI. You can do that by having the bank re-appraise your property. I did this with my first property, while living it, when the market jumped 4 months after I closed on the loan. Got rid of that PMI and have been happy since. Didn't have to refi to get that done.If you do want to refi, make sure that you are getting rid of the PMI. Outside of interest that is your biggest cost on a mortgage. If you do refi, make sure that you are getting the best loan constant, not interest rate, on the new loan. If/when you move out of one side of the duplex, you will thank yourself then. You make your spread based on CAP rate - Loan Constant = Spread. If that is positive, you will make money. If it's negative you will be coming out of pocket every month.Pulling cash out is really a personal preference at this point. I would ask what your reserve amount is for the property. If you have a good reserve built up then leaving it in the property will do better long term as you may eventually be able to get a HELOC on it. But if you think your bank won't offer that to you, then pull the cash out and sit on it. Cash in the bank as reserves, looks really good on paper to banks when you go to get more financing for your next deal. AMHIK.Good luck!

Cosmo Iannopollo · Answer

@Will Chamberlin my current rate is 3.625%. In doing a little more research, not sure how I could even do better. When it comes to more principal, what I was more asking was if I could have the mortgage company consider applying more of my payment towards the principal versus the interest. So I'd still be paying the same amount, just in different spots. Is that even possible?

Warren Bensel · Answer

If your PMI is 100$ a month like mine is, and it only costs 2k rolled back into the loan I would definitely refinance. That's extra cash flow in your pocket, especially since rates are currently lower than they have been in extremely long time. The question is, why would you not refinance into a conventional loan, lose PMI and get more cash in your pocket every month?