Rental Property Investor · Manchester, NH · Member since 2017 · 45 posts · 51 votes
I have a 4-unit MFR under contract and I am comparing financing options for down payments of 10% and below. Not surprisingly, banks are pitching me hard on the FHA loan, which would carry a 1.75% upfront MIP rolled into the loan and a 0.80-0.85% rate premium tacked onto the regular interest rate. I am skeptical about FHA loans, but I am wondering if the federal tax code softens the impact of the MIP.
Is this FHA mortgage insurance, both the upfront loan add-on and the monthly premium, tax deductible for federal income taxes? If so, is the deduction eliminated if/when I perhaps move out of the property at some point in the future and the building becomes 100% a rental property? I assume the upfront MIP, if tax deductible at all, would need to be deducted over the 30-year life of the loan.
P.S. I live in New Hampshire, so I don't pay state income taxes and don't need an answer for this question as it pertains to state law.
Investor · Dover, NH · Member since 2016 · 49 posts · 20 votes
7y
As far as I know, the MIP is not tax deductible. When you move out of the property, or even before, you can contact the lender and find out what you need to do to remove the mortgage insurance premium. In our case, we needed the MIP because we did not have enough for a standard 15-20% down payment at the time of purchase. I can contact the lender at anytime and have an appraisal done to pay off the difference so I have 20% equity and the MIP goes away or I can pay the MIP until we have 20% equity of the original purchase price. I would utilize the rental property calculator on BP to figure your Cash on Cash return using the lower down payment including MIP and then again using the higher down payment with no MIP to determine which is best. Don't forget that by doing the higher down payment you have to factor in the cost of using the extra money which could technically go into another rental property or different investment. No matter what you have to be able to sleep at night so if putting additional money down allows that then go that route. Everyone has a different risk level so that is a big factor. Where is the 4 unit? There are so few around here you have me very curious! Good luck!
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
7y
@Megan Frank I believe you are confusing MIP (fha) and PMI (conventional loan). On FHA, 10% down or less, MIP is for the life of the loan, no removal after 20% equity.
Investor · Dover, NH · Member since 2016 · 49 posts · 20 votes
7y
@Wayne Brooks Thank you for pointing that out! I just googled about it and learned something new too. We have FHA loan from early 2013 so we can remove the MIP from our loan but apparently that is no longer the case. This article explains the difference between the 2 https://www.investopedia.com/ask/answers/071614/wh...
Sorry for pointing you in the wrong direction @Nicholas Gray
Rental Property Investor · Milford, NH · Member since 2017 · 62 posts · 30 votes
7y
I regretfully ended up going with an FHA loan rather than a HomePath or conventional low money down loan with PMI. I think the only advantage in using FHA is that you can potentially get a slightly lower interest rate and can more easily qualify with lower credit scores. I would highly suggest going for conventional if you can, the lending criteria is less stringent and you can remove the PMI when you hit 20% equity.
I regretfully ended up going with an FHA loan rather than a HomePath or conventional low money down loan with PMI. I think the only advantage in using FHA is that you can potentially get a slightly lower interest rate and can more easily qualify with lower credit scores. I would highly suggest going for conventional if you can, the lending criteria is less stringent and you can remove the PMI when you hit 20% equity.