Is Mortgage Insurance a deal killer, or the norm?

Question

I'm working with my mortgage broker on financing for my first rental property. I'm looking to get a 2-4 unit, and I will be an owner occupant in one of the units.

We got into the discussion about what I'd be able to afford to put down, and how I should not put myself in a position where I would be " house rich and cash poor". While I agree with this, I'm intimidated by the 1% PMI for the life of the loan.

So my questions are:

1. Is it normal as a residential multi family investor to put 3.5-5% down and still make a good deal out of it, even with PMI? This makes for a weaker investment, but allows for a larger portfolio, I'd assume.

2. When I hear discussions about 50% & 2% rules, are these assuming 20% down and no PMI?

3. I've heard Piggyback loans mentioned where you finance 80% with the bank via your home mortgage, 10% via a private loan, and bring 10% cash + closing costs to the table. This would eliminate PMI, but I'd be stuck with the higher interest rate on the 10% private loan.

Dave Foster · Answer

Hey John,

The specific loan I was referencing is one that I've seen a couple times (contact me off forum and I'd be happy to give you contact info).  It is specifically designed for a new purchase - that's right heloc terms but done for a new purchase.  The loan locks interest for 5 or 7 years that's where the rate variance comes in.  Although it's a new purchase there's no origination or closing costs for the loan itself.  The bank handles the closing in house or through a captive title company.  They are designed for primary residence but will loan on a primary that is up to 4 units that you live in one of.  All in all a very nice product.

John M. · Answer

@Dave Foster  I meant to tag you above but it looks like I had more trouble with that. Hope you see this as I wrote a few questions above

Joel G. · Answer

@John M. Great discussion! I've been in the same boat with my current situation (looking to put 5% down on a conventional loan). All of my analyses end up showing lower cash flow mainly due to the PMI. I've figured that I need to account for it as part of my expenses (similar to vacancy and property management allowances) and calculate my cash flow on this. I figure if I am able to have positive cash flow after accounting for the PMI, once I get 20% equity, I can refinance and I'll have an instant boost to my cash flow (who can complain with that).

The only bad part, as you have mentioned above, is the fact that you have this additional expense that you need to account for in each of your calculations, which makes it harder to find properties that cash flow.

John M. · Answer

Hey Dave, thank you for the suggestion! I like the idea of getting a loan with no origination fees or points. I'm a little bit confused by what you said: "lending first mortgages at HELOC fees." Can you clarify for a newbie?

I was also a little bit confused by the varying rates you mentioned for 5 years and 7 years  with amortization over 20 yrs. This is entirely new to me.

One other question, you mentioned this strategy can be applied to 4 units. Can it be applies to multiple different 4 unit properties, or would this be a one time thing?

John M. · Answer

@Raymond B. I think I got it! Thank you. I believe my problem earlier may have been that I was using my mobile and the selection went away. Odd.

I did not know about the ability to tag colleagues who had not posted, thanks for the tip!

Raymond B. · Answer

@John M.,

To make the @ work, do the following: Hold down the shift key and type @? Look below this Window, and you will see a list of names of people that have posted in this thread. Click on the name of the person that you want notified via an email, that you responded to them. If you are a Colleague with anyone that has NOT posted in the thread, and you want them to see your post, hold down the shift key, type the @ and the first 4 letters of their First or Last Name. Then look below this Window and click on that person's name. Raymond

Loren Buchanan · Answer

@Wayne Brooks  I didn't realize FHA had changed the rules in 2013! Crazy it stays for the life of the loan.  Thanks for the clarification!

Wayne Brooks · Answer

PMI is removed from your existing loan, once you reach 22% equity, verified by an appraisal usually, and you request it.

John M. · Answer

@Will Johnston So if I did a conventional (which is sounding like the better option at this point), would I have to refinance to get the PMI removed, or could I just request an appraisal once I reach 80% LTV to have it removed but keep the existing financing in place? If I had to refinance, interest rates would change, and my loan term would start over from month 1, correct?

Regarding the HELOC, are these at the same interest rates as the loan, or a higher rate? If so, could I just go the "piggyback" route to begin with?

Dave Foster · Answer

John, There's actually another possibility that's getting some traction down here in the sunshine state and maybe elsewhere for sure.  Smaller regional banks are lending first mortgages at Heloc fees.  So where a traditional lender might charge you 1-2% origination fee, certain banks (again usually smaller community or regional) will loan 90% on a new purchase for an origination fee of $250 with heloc terms.  In one I just worked on Florida Bank lent 90% for an origination fee of $250 5 year fixed was 3.5%.  7 year fixed was 4.5% and the loan was amortized over 20years.  Might not be for everyone but it's a great option for you to explore given that you're going to live in part and rent part.  Florida Bank would do it up to 4 units.

Dave