How to Go from FHA 3.5% to 20% Realistically

[Christian M. Conroy]

Hi all, 

My partner and I plan to buy with the broader DMV area with the intention of moving in around March, 2024 when out rental lease ends. We're giving ourselves a good lead time to do all the necessary research and numbers running, especially given the high price of the market we live in. And that's even accounting for the fact that we're willing to move anywhere around a ~1 hour drive into DC radius.

We are very interested in house hacking. I've read lots of the main books on the topic and now am just figuring out how to tailor the approach to our specific market. One of the key points discussed in a lot of these books is a strategy that involves buying a place with a 3.5% FHA interest loan, living in it for at least a year and for as long as needed to get up to 20% for a conventional loan, refinancing to a conventional loan, buying another place with an FHA loan, and then doing it all over again while also renting out that original unit fully.

I'm a bit unclear as to how that is a feasible strategy given the amortization schedules I am looking at. For example, let's say one buys a place for $400,000 at 3.5% down for a 30-year fixed term with an FHA loan. That means a loan of $386,000. Let's go back to the good ole days just for the example and use an interest rate of 3%.

I've calculated out the monthly principal and interest rate payments manually, but you could also see the full amortization schedule conveniently with a tool like calculator.net. 

In month one, you'd have a principal of $662.39 and interest of $965.00. In month two, that would be $963.34 and $664.05. In month three, that would be $961.68 and $664.05. And so on. Each month the principal pays down the loan balance and adds to equity. Starting from the 3.5% equity at the onset of the loan, it would take 89 months, or 7 years and 5 months to reach 20%. Not exactly a timeline that seems to be part of an early retirement plan. 

Adjusting the interest rate down to 1% changes it to 70 months, or 5 years and 10 months. 
Moving it to 0% only gets it to 61 months, or 5 years and a month. 

So when people are suggesting this as a useful house hack strategy, are they suggesting you pay more than your required monthly at some point to build equity faster? 

Or is this just a lesson that this strategy is only worth it in a very low interest rate environment in a low price market? 

Or am I just doing the math completely wrong here? 

Thanks in advance for any answer!