Refinancing out of FHA after 1 year (house hack)

[Edgar Perez]

Hey BP,

I am looking into purchasing a $170,000 duplex using an FHA loan and house hacking. The duplex is a bank foreclosed REO and I think the asking price is about where the home is valued at. It is located in a nicer part of town, each unit has 3 bed 1.5 bath located on a corner lot. There is not a lot of work that needs to be done to the home, it had to undergo mold remediation but that part is done. Aside from some dry wall, minor flooring and kitchen update the place is solid.

I am pre-approved for the FHA so that is not a problem, my concern is on the Refi. Ideally I would like to cash out refi after a year to get rid of the PMI on the loan and pull out some cash but I am not sure how a refi works.

What do they base the refi off of?  

---I have excellent credit, and a decent savings (after the first year I estimate around 20k in savings) my W2 job brings in 3k a month gross and I think I can get a min rent of 1100 from one side of the rental, estimated monthly mortgage payment under FHA would be about $1000 (not including taxes and property insurance). Any info would be much appreciated. Thanks BP

[Zack Karp]

@Brent Coombs these are next-level strategies that your cookie-cutter LO/lender doesn't take the time, or may not even understand.  Sure, there are risks and what-ifs for every scenario.  The key comment in my post was to know your numbers so you don't get stuck.  But when someone intends to purchase and then refi in a year, assuming they know their numbers going in, then this is a simple math problem that many investors don't even consider or know about.

Follow me here, I'll walk you through it.

For example (I'm not using real numbers here), let's say you are buying a home for $200K using FHA financing, $193K loan amount ($196,377 with UFMIP), and the going rate is 4.0%. Instead of taking that rate of 4%, the lender can give the buyer a rate of 4.5%. This may allow a lender credit of 2% of the loan amount. That would be a lender credit of $3,927, which would be a direct reduction of cash to close. Now the mortgage payment would be $57.47 higher per month. So in 12 months, the buyer would pay $689 more in monthly payments, in exchange for a $3,927 closing cost credit.

Who in their right mind would not take $3,927 for $689?

So to your point Brent, what if?  What if they couldn't refinance for 2 years instead of 1?  Then they would pay $1,379 more in payments over 2 years.  And still get that same $3,927.  Again, who wouldn't do that?

In fact, in this scenario, the buyer doesn't break even for 68 months (5 years, 8 months) by taking that lower interest rate. If that investor can't refi out of FHA and into Conventional for 5 years and 8 months, then they didn't know their numbers, or some life event happened or the economy crashed again, and a 0.5% interest rate difference is the least of their problems.

So many people get caught up on rate, when in fact there are so many other factors that should be considered.  True cost and benefits trumps rate every time.

My point is that if you aren't using a LO who is exposing you to all of your options, not setting you up for future success, or only selling you on having the lowest rate, then you may be using the wrong LO and leaving money on the table or worse, getting stuck.