Is PMI a better choice in a low interest rate environment?

[Eugenia K.]

I've been looking at investing in my first small multifamily property with 20% down, but recently started exploring putting 15% down in order to hold on to more cash (to invest in my next property) and pay the PMI (or MIP). Given interest rates are at historic lows, how do you think about the decision to pay MI? Any good calculators to weigh my options?

It seems like I should be optimizing for using the least amount of my own cash as I can (while holding on to a good chunk of equity) and finding ways to earn a greater return with that cash than the MI. 

More details:

• I have very strong credit
• I plan to hold the property for a long time (20-30 years)
• The property would be in a high appreciating but low cash flow market
• I would be owner-occupying
• It looks like if I go the FHA+MIP route, I'd save 0.50% on the interest rate

[David M.]

@Eugenia K.

Exactly.  One shouldn't necessarily see mortgage insurance as an aspect to "get around."  Just look at it and the upfront mortgage fees as part of the "cost of money."  Sure, the MI is larger percentage now of the overall interest rate, but the overall rate is still so low.  Also, as you mentioned it lets you put less cash down so that you have cash to do another deal.  This it the whole point of leveraging.

How many unit multifamily are you looking at?  With a strong credit score and 2 family (maybe 3) you can also do a conventional loan and it'd be cheaper.  Conventionals have a increasing down payment restriction as there are more units.  single families its as low as 5% (sometimes 3%) and by 4 family units the down payment requirement is 20%to 25%.  I don't remember exactly.  But, its a fannie mae requirement (you can google it) so it affects all conforming loans other than fha.

If your credit is strong, the PMI is cheaper than MI because the private market is more willing to take the risk on you so the rate is lower. Otherwise, the Government steps in with its rate which is why the FHA is considered the "first-time homebyer's" loan which really isn't true.

Don't forget that the MI never comes off a Government-backed loan. Only with a conventional loan does the PMI come off (without refinancing). This is why I bring up the conventional.

P.S. I have no idea what you are saving 0.50% interest going the FHA+MIP route.. You mean the 15% down FHA has a lower interest rate than a 20% down FHA?

Good luck.