Hey there BP community,
I'm just starting out as an investor and I've never bought a property before, so this is a very exciting time for me. This is my dream and its going to come true!
So to jump into things as I've been educating myself on everything. I have listened to many podcasts, got about 8 books, some from biggerpockets and I have to shout out to J. Scott as I seem to have naturally gravitated towards his style. I am also seeking buy and hold with a partner, my brother, and I have learned an incredible amount.
My question lies with mortgages. I have had meetings an a few banks, wells fargo, think bank, a credit union, and I went to my local bank in my hometown called home federal bank. They have been the most helpful by far. I was informed to simply stay away from national banks for a plethora of reasons.
The property is up for 130k aND it is a duplex. I will be living in one unit for primary residence along with my brother. It's a 3/2 unit for us that rents out for $800 (probably even more) and the 2nd unit for $650 that is a 1/1. These rates are typical for our market (except for the 3/2) The rented out unit will not cover our entire monthly costs, but we are both living in the unit, splitting costs and saving from a 75% reduction in our monthly living costs by doing so, our savings will actually be $1000 combined and this is what we are using to build capital, taking a % out for vacancy, maintenance, property management, which is ourselves, but also a backup fund. The rest is going to be deposited into a joint bank account to invest in our next property after a year of saving. We want to use our own money and do things appropriately, smart, and to also educate ourselves in the meantime. After we move on to our next property to make our primary residence we expect a $150 profit per door. That is our rock bottom expectations. Soooo now you have the background of the property and intentions for the lender portion of this deal.
Originally I was going to go with an FHA loan because of how easy it is to start up; however, as I talked to the lender she brought up conventional mortgage. Let's look at the rates and differences and what I'm trying to make my decision on:
FHA
3.75% interest
3.5% down.
PMI through the life of the loan.
Higher insurance premiums.
A little higher mortgage payment.
Conventional fixed rate
4.25%
5% down.
PMI drops at 20% loan to value.
Lower insurance (me and the lender calculated nearly $100 month difference roughly)
Slightly lower mortgage payment.
Now with this information I was provided the conventional is a no brainer as over the long term and beginning costs are less. 5% down is my max for down payment I can do in order to cover all other fees to seal the deal. The interest rate nearly cancels out because of the increase in down payment. The real kicker here is the PMI that I am just not all to familiar with.
My worry here is I'm not educated well enough to know details about the two loans. What if something happens later down the road where I start losing money because of the loan I chose or I missed out on saving money because I was simply unaware of a perk from the other loan? My selling point to go with the conventional was the premium for PMI is nearly $100 less then the FHA and after the 20% loan to value is reached it automatically drops. That's an additional huge savings.
Ive read multiple times to get an FHA as a starter, but this seems better is it not? Help me guys! Thank you for reading my lengthy post :)
- Matt