PMI: FHA vs. Bank/ Credit Union

[Mark Carbonaro]

Hi there,

I'm looking to house hack a small multi-family property and am thinking of different financing options. I plan to occupy one unit of the residence for at least a year and rent out the other(s).

In looking to get a loan with an LTV > 80%, the two options I'm considering are:

-Get an FHA mortgage, put 3.5%-5% down, and refinance 12 months after closing to get rid of the monthly PMI expense.

-Get a non-FHA mortgage, pay the recurring PMI at first- knowing it will (hopefully) go away after I've built up 20-22%+ equity in the property.

Assuming consistent PMI costs and interest rates between options (before &/ after refi), the only scenario in which I can see the second option being more beneficial is if I had put enough money down to hit that 20-22% equity level within the first 12 months.

This seems implausible due to mortgage payments barely paying off any principle in the first year, not to mention I'd think the only way I could attain that level of equity so quickly is if I had put down 15%-18% initially, which virtually eliminates the benefits of a "low" down payment.

I don't have any specific properties, institutions, or rates in mind, and while I'm sure these questions would be more easily answered on a case-by-case basis, what are some considerations I may be overlooking? Any constructive input on this topic is greatly appreciated.

Thanks!

~Mark Carbonaro

[Chris K.]

@Mark Carbonaro

If you think of it from an IRR perspective (meaning you are forced to think about when you are going to sell this property), it's almost always better to use less of your own money. I don't want to speak in generalities, but I will rather pay more in interest rates and suffer through any other expenses like PMI if it means I don't have to use as much as my own money.

You might be overthinking here --- I don't know how expensive of a property you are looking at, but I have a hard time seeing PMI costs derailing a deal. I suppose that could happen if you are in an area where small multi-families sell at SFR prices (meaning property value scale faster than the rent that it generates). But overall, I would focus on finding the right property instead of worrying about PMI costs.

I wish I could house hack as well. Do it before you get married --- many spouses are not into it!  

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.