Nuanced PMI removal question

4 Replies

For context, my ultimate goal is to increase cash flow over the next 5-10 years by lowering monthly expenses.

In 2015 I acquired a duplex with an FHA loan of 3.49% that has PMI that is $214 a month on a total mortgage of $2258. Last year I bought another duplex, moved out of the first one and am now renting both sides of the first duplex. I inquired about how to remove PMI from the first/2015 duplex and was informed the PMI is attached to the loan for its duration. The only way to remove it is to refinance into a different type of loan.

I've been talking to different loan officers about this, trying to see if it makes financial sense to refinance out soon.  As of right now I'm getting interest rate quotes in the 5-5.25% range for 30 year conventional loans for a rental property.  The quotes are bringing my monthly payment to about $2358, increasing my current monthly note by about $100.

My understanding is the fed has clearly indicated it intends to raise rates at least once more before 2018 is over. So breaking out of this FHA loan is only going to get more expensive in the near-term the longer I wait.

I'm wondering if it even makes sense to try and break out of this loan now that the interest rates are getting higher (and will probably stay higher than 3.49% for years).  PMI is such a dirty word but if the PMI even for a lifetime - or at least the next 10-15 years results in lower payments than I get with a refinance in the short term, should I just suck it up and keep paying it indefinitely?  I feel like I may have already missed the refinance window.

I also am not clear on what all I should evaluate to make this decision.  I owe about $307K on the property.   According to general online property estimates the value has increased since purchase from about $330K to $430K.  I don't know how accurate those are but I do believe the property value has and will continue to increase because of the section of town it is in.  So that makes me wonder if I should just calm down, wait 4-5 years in the hopes the property will continue to appreciate while I'm paying down the principal and then reevaluate refinancing, even if the interest rates are 5.5% or higher.

Any help for someone or someones w/some experience with this type of situation would be greatly appreciated.


Landlord Neophyte

@Joseph Collins How long is your hold? I would run a scenario with the hold time and money spent on interest and PMI in both a keep current loan and refi scenario. See which one has a higher cost? If the property has appreciated and you’d like capital back that is another thing to consider. Is PMI a deductible expense? If not that’s a case for a refi.

Hi Lee,

My hold is indefinite. No plans to ever sell, at least not by choice. How can I tell if PMI is a deductible expense? Ask a tax professional?

Regarding duration, since it's indefinite would the question I should ask myself be, how long do I think it would take me to (for example) have enough cash to recast the loan and get a payment that's lower than what it is now--or simply how long would it take for me to save enough to refinance (assume the interest rate is higher) and put down a large enough amount to make the note lower?

I could start with a future target of say $214.00 lower monthly P&I and see how much money I'd need to put down into a refi to get that immediately OR how much I'd need to put down on a recast assuming the interest rates I'm getting quoted now...?

Basically my question is which/what info should I be trying to assess to determine if it's worth waiting (and this risking an even higher interest rate, which I know is coming) to try and refi or refi and recast at a future date to have the *flexibility* of lowering my monthly note -- or should I just leave it alone because it's low due to the 3.49% rate (even with the PMI tacked on)?

Keep the FHA for now. I am assuming you are including taxes and insurance in your numbers because this is residential and a loan for 307k at 5% makes the monthly payment $1627. Look at it like this:

If it appraises for at least 383k you could get a 307k loan at 5% for 30 years gives you a monthly payment of $1627 and over the course of the loan you will pay 278k in interest. 

A 307k loan at 3.49% for 30 years gives you a monthly payment of $1367 and you pay 185k in interest over the life of the loan. Add the 214 per month paying PMI and your payment comes to $1518 and 262k in total interest and PMI payments. The numbers speak for themselves. This all changes of course if you make extra principle payments but the way it stands now it is still cheaper to keep paying PMI. Amazing the difference of 1.5%

@Peter M. Thank you for the reply.  I get what you're saying with the numbers, completely tells a story.  Looks like I missed the low interest boat and should sit tight.  

You're correct that I included the taxes and insurance in the numbers I posted.  Here's the break out based on my last mortgage payment):

525.92 Principal

898.12 Interest

370.37 Taxes

214.79 MI

55.92 Flood

188.58 Hazard

Seeing that $898 in interest makes me nauseated, but whatever.  Yeah, 1.5% makes a big difference.  I think two things are working against me, a) the rising interest rates and b) the fact that rental interest rates are by default higher than primary residence.

Thank you for your reply!

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