House hacking with a high interest rate

[Codey Wendel]

Hello everyone. I just started the mortgage application process and have been pre-approved for a loan with a 6.75% interest rate. I was planning on purchasing a duplex this summer and going the FHA route, but now am not sure if it's the right decision with how high interest rates are. My price range is 200-250k and my total interest paid when it's all said and done will exceed the purchase price. I don't want to sit around waiting for interest rates to drop and pass on some good opportunities, but I'm also not sure if I want to pay that much in interest.

Does anyone have any opinions on this? Would refinancing a few years after purchasing make my numbers look better? 

Thank you in advance.

[Ryan Thomson]

If you can reduce your living expenses by house hacking its a win. What I mean is if your payment towards the mortgage (and budgeting for future expenses) is about what you would pay towards rent then there is high probability that it will be a better investment than renting and waiting. 

If rates go down it will put upward pressure on home prices.

[Ryan Thomson]

ALSO @Codey Wendel- When looking for a good house hack I consider a couple of things.

1. 1. Will it reduce my cost of living when compared to renting?
2. 2. What is my net worth ROI on my down payment and is this better than another investment opportunity.

Your Net Worth ROI calculation takes into account the appreciation, loan paydown, tax benefits, and the rent avoidance (the difference in what you pay towards your mortgage compared to your rental situation). The total of that number over the year divided by your 5% down payment is your net worth ROI. Because you are getting the home for 5% down and hopefully holding for the long term, you will almost certainly be get a better ROI than the ROIs you can get elsewhere in the investing world.

That is what I look for. Now, how do I calculate that? I have a great calculator to help figure this out.

The inputs for the image in this screenshot are as follows:

500k purchase price duplex.

Rent each side for 2k/month (this is after you move out)

5% down payment

Closing costs: 7k

6.4% interest rate

Insurance: $250/month

Utilities (paid by owner): $400/month

Vacancy budgeting: 5% of monthly rent

Maintenance budgeting: 8% of monthly rent

CapEx budgeting: 7% of monthly rent

Even though you are negative $312/month after budgeting for future expenses your net worth ROI is massively positive. Real estate is one of the best ways to build long term wealth. And house hacking is an incredible hack to get started with only 5% down.

(see screenshot below).

[Jonathan Pflueger]

[Codey Wendel]

Quote from @Zeke Liston:

Quote from @Codey Wendel:

Hello everyone. I just started the mortgage application process and have been pre-approved for a loan with a 6.75% interest rate. I was planning on purchasing a duplex this summer and going the FHA route, but now am not sure if it's the right decision with how high interest rates are. My price range is 200-250k and my total interest paid when it's all said and done will exceed the purchase price. I don't want to sit around waiting for interest rates to drop and pass on some good opportunities, but I'm also not sure if I want to pay that much in interest.

Does anyone have any opinions on this? Would refinancing a few years after purchasing make my numbers look better? 

Thank you in advance.

 Hey, Codey, if you decide to wait until the rates drop, the prices will likely be higer. I'm personally buying pretty aggressively with the plan to refinance down the road. With that said, I'm still making sure the deal makes sense with the current rates. Good luck! 

 Much appreciated Zeke!

[Codey Wendel]

Quote from @Ryan Thomson:

ALSO @Codey Wendel- When looking for a good house hack I consider a couple of things.

1. 1. Will it reduce my cost of living when compared to renting?
2. 2. What is my net worth ROI on my down payment and is this better than another investment opportunity.

Your Net Worth ROI calculation takes into account the appreciation, loan paydown, tax benefits, and the rent avoidance (the difference in what you pay towards your mortgage compared to your rental situation). The total of that number over the year divided by your 5% down payment is your net worth ROI. Because you are getting the home for 5% down and hopefully holding for the long term, you will almost certainly be get a better ROI than the ROIs you can get elsewhere in the investing world.

That is what I look for. Now, how do I calculate that? I have a great calculator to help figure this out.

The inputs for the image in this screenshot are as follows:

500k purchase price duplex.

Rent each side for 2k/month (this is after you move out)

5% down payment

Closing costs: 7k

6.4% interest rate

Insurance: $250/month

Utilities (paid by owner): $400/month

Vacancy budgeting: 5% of monthly rent

Maintenance budgeting: 8% of monthly rent

CapEx budgeting: 7% of monthly rent

Even though you are negative $312/month after budgeting for future expenses your net worth ROI is massively positive. Real estate is one of the best ways to build long term wealth. And house hacking is an incredible hack to get started with only 5% down.

(see screenshot below).

Thanks for putting this together Ryan, this is great. I will definitely be using this calculation and taking into consideration the points you brought up.  

[Codey Wendel]

Quote from @Robert-Lee Pass:

Quote from @Codey Wendel:

Hello everyone. I just started the mortgage application process and have been pre-approved for a loan with a 6.75% interest rate. I was planning on purchasing a duplex this summer and going the FHA route, but now am not sure if it's the right decision with how high interest rates are. My price range is 200-250k and my total interest paid when it's all said and done will exceed the purchase price. I don't want to sit around waiting for interest rates to drop and pass on some good opportunities, but I'm also not sure if I want to pay that much in interest.

Does anyone have any opinions on this? Would refinancing a few years after purchasing make my numbers look better? 

Thank you in advance.

So this duplex , are you planning to rent out both sides eventually? If you are then who is actually paying all that interest? If you arnt and your going to live there long term then again.. your other side is paying a very nice chunk of the overall interest. I think its typical to see 95-110% TIP just matters to me who is actually supplying the money to pay that interest . In the end the Equity is mine .. on the path to the end the interest is paid by the tenant imo

 Yes, I do plan on renting out both sides eventually. I didn't really think about who will actually be paying the interest, just saw that big number and got scared. Thank you for bringing this up, I feel a lot better knowing the tenant will be paying some, if not all of the interest.

[Wale Lawal]

@Codey Wendel

Real estate investing decisions may be impacted by high interest rates. Evaluating the financial ramifications of your investment is essential for making well-informed decisions. This includes comparing the overall cost of financing throughout the course of the loan, including interest payments, to prospective rental income and property gain. To get the best answer, think about other financing choices including portfolio loans, private lending, and conventional mortgages.

If interest rates and market conditions change in the future, think about refinancing in the future. You should also weigh the costs and viability of refinancing. Make sure your choice is in line with your financial situation, risk tolerance, and investing goals. Even with the high interest rate, it can still be worthwhile to pursue the property if it offers a strong financial potential. Speak with a financial counselor or mortgage specialist to go over your particular circumstances and investigate all of your choices.

Good luck!

[Remington Lyman]

Quote from @Codey Wendel:

Hello everyone. I just started the mortgage application process and have been pre-approved for a loan with a 6.75% interest rate. I was planning on purchasing a duplex this summer and going the FHA route, but now am not sure if it's the right decision with how high interest rates are. My price range is 200-250k and my total interest paid when it's all said and done will exceed the purchase price. I don't want to sit around waiting for interest rates to drop and pass on some good opportunities, but I'm also not sure if I want to pay that much in interest.

Does anyone have any opinions on this? Would refinancing a few years after purchasing make my numbers look better? 

Thank you in advance.

 I would still do it. I bought in 2017 when a lot of people thought we were at the top of the market in Columbus, Ohio. Columbus has continued to grow though

[Christopher Morris]

I listened to everyone here on BiggerPockets and didn’t “time the market” in regard to the higher interest rates.

I closed on a house hack a few months ago with the SAME EXACT rate. I do not regret it for a second! If you're doing it right. Your tenants will be paying most of the PITI.

Good luck!

[Mike Paolucci]

Quote from @Codey Wendel:

Hello everyone. I just started the mortgage application process and have been pre-approved for a loan with a 6.75% interest rate.

@Codey Wendel I wouldn't worry about the interest rate being where it is at right now. Worst case scenario, it goes up and you'll be happy you have the rate you have. Best case scenario, it drops and you can refinance later on into a much better rate. Either way, it's a win-win imo. If the numbers for for you right now, I would do it. 

[Austin Steed]

Quote from @Codey Wendel:

Hello everyone. I just started the mortgage application process and have been pre-approved for a loan with a 6.75% interest rate. I was planning on purchasing a duplex this summer and going the FHA route, but now am not sure if it's the right decision with how high interest rates are. My price range is 200-250k and my total interest paid when it's all said and done will exceed the purchase price. I don't want to sit around waiting for interest rates to drop and pass on some good opportunities, but I'm also not sure if I want to pay that much in interest.

Does anyone have any opinions on this? Would refinancing a few years after purchasing make my numbers look better? 

Thank you in advance.

 House hacking is great because of the loan down payment and what that can do to your cash on cash returns. I house hacked 4 times in 5 years in Columbus OH and still would be looking to do it again! So if the numbers are solid house hacking is always a good way to go. 

[Ryan Thomson]

@Codey Wendel

The amount of Interest exceeding the purchase price is not surprising when buying a house on a 30 year mortgage. I wouldn't be very concerned with that statistic. You'll also pay more than a mortgage in rent if you rent for the next 30 years. 

In Colorado Springs, we have a program that allows my house hackers to buy a house for $1,000 and the rest is covered with a 0% loan. The income limit is 160k! So most people qualify. See if there is something like that in your area. Then you could buy now before competition becomes crazy again and refinance when rates come down.