Using FHA Loan to purchase Duplex - Put down more than 3 1/2%?

[Kelsy White]

Hello BP Community,

We are planning on purchasing a duplex to live in one of the units and rent out the other. I mentioned using a FHA loan and only putting down 3 1/2% so we could use the rest of the money we have saved to go towards purchasing another rental property. However, we've been going back and forth about whether we should put more than 3 1/2% down to lower the monthly payments and interest.

What are your thoughts? Is it a poor strategy to only put 3 1/2% down?

[Chris Mason]

Originally posted by @Kelsy White:

@Anthony W. I was not aware of the MIP, so I'm glad I asked! I've heard a few real estate investors mention using the FHA loan to start out, but I don't recall them mentioning MIP. I'll need to factor that in and maybe rethink my plan a little bit - thanks for your help!

3.5% down 2-4 unit FHA, gets you in the door. With life-of-loan mortgage insurance, as mentioned.

10% down 2-4 unit FHA, you get mortgage insurance that drops off after 11 years, and that is a tad bit cheaper in the meantime.

20%, boom now you're going conventional and no mortgage insurance.

In any/all cases above, you would/could look at refinancing down the road if it makes sense. For example if the property appreciates and you have >20% equity, you could knock off the mortgage insurance with a refi, where the equity can serve in lieu of a down payment.

Almost no one goes above any of the milestones without going all the way to the next one, (f. ex 9% down or 18% down... go all the way to 10% or 20%, or stick to the lower tier) since the benefit is so marginal, relative to staying liquid.