Pay off PMI or save for a rental?

[Garrett F Anderson]

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]

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.