Pay off PMI or save for a rental?

Question

I purchased a house in a neighborhood with a strong rental market.  I bought the house with an FHA loan so there is PMI on top of my mortgage payment.  If I were to move, it wouldn't make sense to rent out the house because the CF would be negative.  Without the PMI, it would CF around $200 (estimated) and that includes taking out money for all expenses (capex, management, taxes, vacancy, etc.).  I don't plan on moving out soon but as I am starting to earn money I am faced with the question:

Should I use my excess money to pay off my house quicker until the PMI is gone and save on my monthly mortgage payment, then eventually I can move out and turn it into a rental

or

should I save that money for a down payment on my first rental and continue paying my current mortgage?

Thank you for your time!

Cassi Justiz · Answer

So depending on when you purchased your home, you may not be able to get rid of the PMI. FHA loans have a special type of PMI (called MIP) that stays with the loan as long as you have it. In order to get rid of it you will have to refinance the property into a conventional loan. Unfortunately this isn's commonly known, so a lot of people pay down their loans to get rid of the "PMI" and don't realize that it won't go away until they refi out of the FHA loan.

If I were in your position I would refi as soon as possible out of the FHA loan (while still living in the property) and then pay down to get rid of your PMI. Then you can buy a new primary residence with a low owner occupant rate and down payment, move out of your current residence, have a cash flowing rental and repeat the process.

Garrett F Anderson · Answer

@Theresa Harris I plan on staying in the area for at least several years because I recently got a job as an analyst and the commute is only 20 mins.  With that being said, I will probably save for a rental because I have no incentive to move!  Thanks for the reply

Lawrence Paul · Answer

Garrett,

I am in a similar situation, but no FHA, just PMI on a 5% down deposit.

Recently purchased my first rental (1060 square feet) and plan on turning my current residence into a rental once my small family outgrows the 1060 square feet (If we ever do).

My residence and rental are identical.

I was personally thinking of picking up a second rental before even considering paying off my primary residence's PMI...but I am not 100% sure if the numbers could agree with me or not?

That way, if we did want to move, I can still pick up a fourth mortgage without jumping through the 5-10 rule.

Food for thought.

Rachel H. · Answer

@Garrett F Anderson If you decide to refinance to get rid of the PMI, you may want to check with your existing lender regarding your options. They may have a few different programs to offer you. Though, you always want to shop around and compare rates. Good luck!!

Garrett F Anderson · Answer

@Chris Mason Thank you for the info!  Sadly, I definitely don't have enough equity in the house to be less than 80% LTV even with a new appraisal.  I just bought the property in Sept with 5% down and the appraisal at the time was only $3000 more than what I paid.  I will keep this in mind though over the next year or two!

Chris Mason · Answer

FYI: if you took out an FHA loan recently with less than 10% down, dropping the mortgage insurance isn't as simple as paying it down. You would have to refinance.

The good news, however, is that a new appraisal will  be done and just how much you have to put down to drop the PMI will be based on that. Meaning if the appraisal says you're already at <80% LTV, you wouldn't have to come in with anything. If it says you're at 84% LTV, then you'd only have to come in with that 4% plus closing costs to get it to 80%.

Lawrence Paul · Answer

That is what I love the most about REI.

A pure numbers game and math does not lie!

Theresa Harris · Answer

@Garrett F Anderson

It depends on what your goals and timeline are. Do you plan on staying in the same area or will you be moving to another town in the next year or two?  If you plan on moving in the next year or two to a different location, put the money on your current mortgage, you can take it out when you sell your house.  If you are staying in your house long term and want to buy a rental meantime, then save for a rental. There is no point putting the money on your current mortgage to turn it into a rental if the numbers don't make sense.

Garrett F Anderson · Answer

@Lawrence Paul Thank you for the input! Thankfully, I still have plenty of time before I have to decide, so we will see what the numbers say when the time comes.

Garrett F Anderson · Answer

@Cassi Justiz

Thank you for the reply! I definitely didn’t know about the MIP, I will look into my mortgage to see exactly what I have and whether I can pay it off or not.

Pay off PMI or save for a rental?

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