Currently have FHA, should I go conventional and increase my IR?

Question

Hi, I am trying to think of the best decision to make with the loan on my current home. I have gotten mixed answers on what is the best route to go. Anyway, I bought my home in 2015 with an FHA. I now rent out my entire basement and would like to purchase an investment property at the end of next year, 2017. My current rate is 3.375% not factoring in PMI. Rates have gone up now but was wondering if it is still wise for me to refinance in order to get into a conventional loan (my home has 20% equity). I have been told to stick with my current rate and the FHA loan. But I was thinking that if I get into a conventional loan, I will save money in the long run and have freedom to possibly buy another property with an FHA loan, make it my new primary residence, and also rent out the basement. Is there ever a benefit to staying in an FHA loan?

Christopher Nerio · Answer

Hey Edward A. thanks for you help. I don't plan on occupying the next property. I'm currently house hacking and saving  money to buy the next property with 20% down and a conventional loan. At least that is my plan. Thanks again.

Christopher Nerio · Answer

Hey Edward A. here are my reasons why and feel free to let me know what you think:

1- Although I have been renting out my basement for 21 months, I have paid about $16,700 in mortgage payments. I would lose practically lose that money because I would be refinancing to get into a 30 yr. conventional loan at 4.375%. It would lower my monthly payment and eliminate PMI but it would also restart my loan and in the long run I would pay almost $30K more to pay off the house.

2- I have enough equity in my home to where I have at least $30K I can use to put on a DP for a property with a conventional loan.

3- My area (Loudoun County) is very expensive and not ideal for investing with low money. I don't see many MFHs in my area and most of the MFHs I see in my price range are further west of me and would add an extra 45 min to my 40 min drive to work already. With an FHA loan, the property would have to be owner occupied, which means my wife, her mom and I would have to commute a lot farther for work.

4- I have been looking at MFHs (2-3 unit) to be honest in the $100-$145K range. However, it feels to me that at  first I may be more comfortable with an SFH because it may be easier to manage. To me it depends on the market which property I choose, which I am still trying to narrow down my market. But yes, I agree, an FHA on a MFH is definitely a wise decision in my opinion too.

Do you think, it would be worth the loss to get out of the FHA loan?

Christopher Nerio · Answer

Thanks @Jeff Brower and Edward A. for your help. After speaking to different lenders and calculating everything, it seems that it's best for me to stay in my current situation. I will come back around in 6 mo. and analyze the situation then.

Marshall Martinez · Answer

@Christopher Nerio If you want to PM me the loan details I can crunch some numbers for you based on today's rates.

Marshall Martinez · Answer

@Christopher Nerio Keep in mind by doing a FHA cash out refinance you will be subject to another up front mortgage insurance premium. Which I believe is 1.75%.

Have you shopped with any brokers? They can usually have the lender pay closing cost on a refinance, too bad I'm not licensed in Virginia. In that case it would be worth it to refinance into a conventional and get rid of your PMI. That way you can take that extra money and put it towards the principal and build your equity much quicker.

Marshall Martinez · Answer

I agree with @Edward Aponte, refinance. The PMI is like burning cash each month when you could put it toward to principal balance on a conventional loan. Pay extra each month to lower the duration of the loan.

Edward A. · Answer

You can always pay extra per month on your new mortgage to knock down the 30 year term and overall interest. See how the math works out with all of that including the PMI portion. Rates have lowered since your original post as well.

But, if you don't plan on occupying your next property, it may not be worth the trouble. And even if you were occupying, conventional loans are pretty competitive with FHA when it comes to SFRs.

Hope that all helps.

Edward A. · Answer

Sounds good Chris. Just curious though, why are you sticking with the current FHA loan? Reason I suggested refinance is because although rates are increasing, they're still relatively low now and they're only going to get higher (most likely). Freeing up your FHA now to allow for future use would seem like a good bet.

Also depends what type of properties you're buying and living in. If you wanted a 4-unit, having that FHA free to use would be nice. If you're looking at just SFRs to occupy, FHA isn't as important.