Refinance 30-year FHA loan to Portfolio loan?

[Wendy N.]

Hello BiggerPockets! Long-time reader, first time poster. I accepted Brandon’s 90-day challenge and closed on my first owner-occupied 4-unit property earlier this month and I’m moving in this weekend. We decided to house-hack as my wife and I do not need the space in a SF. With regards to financing, I believe I made a lot of mistakes and I’m hoping to not keep making them so I’m reaching out to the BiggerPockets family for some advice. I purchased the property with an FHA loan (3.5% down) and used most of the sellers’ credit to pay the UFMIP and buy down the rate. I now realize this was likely a mistake. Nonetheless I’d like to eliminate the monthly MIP and understand I’ll have to do a refinance to do so. With refinancing for a 4-unit, the only options at this point are conventional (requires 20-25% down which is not an option for me), or a portfolio product. On the latter, the lender is offering a 80/15% product. The 80% is a 10-year arm (paying fixed interest rate for 10 years and it’ll become variable after this period). The 15% is a 20-year fixed loan that would be fully paid off at the end of the 20 years. Refinancing to this option will reduce the monthly PITI by $500, and there is no PMI or MIP. I do not like arms/variable products, especially since the bad rap they got in the 2008 financial crisis. Should I stick with the FHA product or refinance to save $500/month, but end up with a variable product in 10 years? Thanks BiggerPockets for your comments.

[Dean Fryer]

First, congratulations on your purchase and for succeeding at Brandon’s 90-day challenge. Way to go!

I suffered from the 2008 financial crisis because of poor choices made as a new investor—I started out in 2006. The lessons I learned from that made me more cautious and conservative in my approach. With my purchases of SFR's since then I have stayed away from the ARM products because I personally want to know what my payment will be throughout the term of the loan.

With that said, cash flow is king. If you are in positive cash flow with your monthly MIP, I would force an increase in rent through improvements as suggested by @MichaelLewis, build equity and refinance later with a conventional loan.