Should I refinance FHA to terminate PMI

Question

Hi All!

I purchased a duplex for $340k w/ 5% down on a 30 yr-FHA @ 2.75% w/ $21k all in. I currently cash flow $265/mo (10.6% coc). PMI is $213/mo.

This is a house hack, so next yr cash flow $640/mo for a 25% return. The PMI is forever. Thats $76k over 30 years! I plan on holding long-term.

Should I refinance and put another $57k down for 80% LTV to terminate PMI or even $27.5k for 90% LTV to end PMI in 11 years?

Strong numbers even w/ PMI make me want to save my cash for the next property. Thanks for any and all comments!

Will Fraser · Answer

Hi @Sam Morgan, nice work on this house-hack!  I'd put this is the "strong no" category.  I consistently see folks getting hung up on MIP with their FHA loans (or even with PMI on a conventional loan) based on the lifetime value of the MIP.

When you're running your numbers on a house-hack the MIP is simply a line-item expense in your total costs.  Specifically it is THE line item that allows you to buy a $340k asset for $21k, paying it back over 3 decades at a stupid low interest rate -- without quasi-governmental intervention that wouldn't be possible and the trade-off is that there is an additional finance cost associated with it.  IF your numbers work with MIP factored in, which a 25% ConC sounds like it is working hard for you, then I'd look to refinance IF and WHEN:

• You've paid down the loan to approximately 80% Loan To Value
• You've gained equity in the property due to appreciation

Other than that I personally wouldn't put a dollar into the hack that I didn't have to, especially not to chase away MIP.  =

Paul Bermingham · Answer

I would say that whether or not to work towards eliminating your PMI depends on your goals. If your goal is to build your portfolio quickly, I would recommend using your capital as a downpayment on your next property.

What are the appreciation rates in your area? After 5 to 10 years in many markets, your property will have appreciated to the point where you will be able to refinance to remove the PMI. Also keep in mind that your mortgage will be paid down somewhat as well.

Since your are already using the house hack strategy, why not do it again. Buy another multi family home and move to recreate what you have already been successful doing? That would allow you to purchase the property with a relatively small downpayment, use your capital to renovate, and then refinance to knock out PMI and recoup some or all of your capital investment.

Jon Kelly · Answer

@Sam Morgan, I completely agree with @Will Fraser and think this is a "NO." Including PMI, what is your adjusted mortgage rate, low 3%?

A quick way to answer the question about the refi is, can you use the $57k to earn more than your adjusted rate (e.g. 3%)?

Another way to answer the question is running the analysis with +$57k and no PMI. You monthly cash flow increases, but your CoC is cut in half.

You have a great house hack that returns 10-25%, and I imagine you can use the $57k to find a similar opportunity out there. Congrats and best of luck on your next one!

Sam Morgan · Answer

Awesome @John Bradley thanks for your comments!

John Bradley · Answer

@Sam Morgan heck yeah man! Keep building value to your duplex, refi to conventional once you think it could appraise for 80-85% LTV or so and then onto the next one! 👍

It might be worth looking into other multifamilies and seeing what value adds their doing so that the appraisal comes in higher right out of the gate.

Sam Morgan · Answer

@John Bradley I'll be aiming for a quadraplex. Would settle for SFR with conventional 5% down in the same area as well. I'd like to keep hacking for as many years as my lifestyle allows.

John Bradley · Answer

@Sam Morgan

What property type are you going for on the next property? I'm assuming you wanted to go FHA for multifamily only being minimal down granted you could go 5% down on the next one if it's a single family. You can have multiple FHA loans if they're around 100 miles away from each other and a couple of other guideline restrictions.

Sam Morgan · Answer

Hi @John Bradley and thanks for your input. Yes, I want to carry another FHA or conventional loan for another house hack in July after the current is seasoned. Credit scores took a beating from my last purchase and solar panel installation on the roof, but still about 770.

I've read that only one FHA loan per borrower can be used at a time - do you know otherwise? I would like to be prepared if I need to go the conventional route.

John Bradley · Answer

@Will Fraser Is definitely right on this approach. Personally when you look at the outside perspective looking in, I never recommend clients pay down priciple to get rid of PMI. It's not worth that much of your cash.

@Sam Morgan Now with where the market is right now, do you need your FHA loan down the road? I have clients doing FHA streamline loans to get 2.25% and then they hold onto it for the rest of your life! Or you could chance a conventional appraisal and see if you're loan to value has gone up (appreciation, increase rents, etc) to drop it off sooner.

To better answer this I would ask, what's your next step? Are you going to do the same thing again with an FHA loan on the next property? Also, how are your scores looking currently? Are you 680+ or no?

Sam Morgan · Answer

@Will Fraser Thank you and that is great advice! You make some excellent points abut baking the PMI into the paper expenses. The beauty of house hacking is the extent to which one can borrow with little out of pocket. I think I mostly appreciate your point about letting the property gain equity organically over time to refinance without additional cash injection on my end.

@Paul Bermingham this neighborhood has consistently appreciated at 5%/annum. Its tough not to take advantage of 2.4% interest on a refi, but my cash goes further by using it for another purchase. My goal is more cash flowing doors. Thanks for your input!

@Jon Kelly Yes, the CoC is cut down significantly, but still in the high teens, which is why I brought the question to BP. A mentor has been persistent that $76k in PMI over the life of the loan is too much and I should refinance. I think its a reasonable price to pay in order to keep the cash I have now and maintain positive cash flow, especially if I can refinance to cut MIP once more equity is gained organically over time..

Thanks for your comments gentlemen. I feel more resolved.

Should I refinance FHA to terminate PMI

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