Fair Lawn, NJ · Member since 2016 · 12 posts · 1 vote
Hi all,
I've been a "renter" all my life and finally buying a townhouse in state of NJ to live in.
After reading a lot about putting my money to work and I do have over 130k to work with, I am now thinking if I should avoid doing the 20% down payment (70k) on my new townhouse and instead do the 3.5% FHA loan and use my savings for buying rental properties.
Where I live, I can get a
Studio for 140k and rent it for about $1,200-1,300
1 Bedroom for $200k and rent it for $1,500-1,600
Bottom line is ... at just 3.7% APR loss, I can put my money into more properties or even places like mutual funds where it may be making me 7%+.
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10y
MATH TIME MOTHERTRUCKERS.
$350k purchase price, going to use California numbers because that's what I know.
20% down conventional v 3.5% down FHA.
$70,000 out of pocket v $12,250 out of pocket (let's pretend closing costs are identical, so only the down payment changes).
What is the cost of keeping that $57,750 in your pocket?
20% down: PITI is ballpark $1991.
3.5% down: PITI is ballpark $2442.
$451 month difference, to keep $57,750 in your checking account.
What does it cost to borrow this extra $57,750?
$451 * 12 / $57,750 = 9.37% effective marginal interest rate to borrow that extra money!
Keeping that $57,750 in your pocket is mathematically nearly identical (less any applicable tax advantages, among other things) to taking out a second mortgage for $57,750 at 9.37% after putting 20% down.
Are you really going to put that $57,750 to work elsewhere earning you better than 9.37%?
I don't know the answer to that, only you do, but that's the question before you. And keep in mind that doing 20% down is a guaranteed marginal 9.37% compared to 3.5% down which is a speculative 9.37%.
Does that mean I hate FHA 3.5% down? No, absolutely not! But borrowers that have the option should be aware of the true cost of that money they are keeping in their checking account, so they can make an informed decision.
Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
10y
David,
FHA and conventional loans under 20% are subject to PMI. If you believe you will use the savings from an FHA loan (20 - 3.5% = 16.5% of property price) to make more than the cost of borrowing and the cost of PMI, by all means do that.
Keep in mind that non-primary housing loans will require 20-25% down.
Bottom line is, it's actually quite expensive to take out a loan less than 20%. Can you beat that IRR through investment? Is it worth the additional risk you take on from that extra investment?
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
@David Levy, on top of what @Marcus Johnson wisely pointed out, I remind you that in order to buy that Studio for $140k using FHA guidelines, you would be required to live in it yourself for at least a year ie. no rent forthcoming! And so on, each time you move.
You can buy up to a 4-plex using FHA guidelines. What do THOSE numbers look like? Cheers...
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10y
MATH TIME MOTHERTRUCKERS.
$350k purchase price, going to use California numbers because that's what I know.
20% down conventional v 3.5% down FHA.
$70,000 out of pocket v $12,250 out of pocket (let's pretend closing costs are identical, so only the down payment changes).
What is the cost of keeping that $57,750 in your pocket?
20% down: PITI is ballpark $1991.
3.5% down: PITI is ballpark $2442.
$451 month difference, to keep $57,750 in your checking account.
What does it cost to borrow this extra $57,750?
$451 * 12 / $57,750 = 9.37% effective marginal interest rate to borrow that extra money!
Keeping that $57,750 in your pocket is mathematically nearly identical (less any applicable tax advantages, among other things) to taking out a second mortgage for $57,750 at 9.37% after putting 20% down.
Are you really going to put that $57,750 to work elsewhere earning you better than 9.37%?
I don't know the answer to that, only you do, but that's the question before you. And keep in mind that doing 20% down is a guaranteed marginal 9.37% compared to 3.5% down which is a speculative 9.37%.
Does that mean I hate FHA 3.5% down? No, absolutely not! But borrowers that have the option should be aware of the true cost of that money they are keeping in their checking account, so they can make an informed decision.
San Jose, CA · Member since 2016 · 9 posts · 5 votes
10y
David,
As it was mentioned, it all falls into math between lower interest (but presence of MI) on FHA loan vs ROI on 16.5% down payment saved as a result of not going conventional with 20% down.
Regarding MI on FHA loan: I was initially looking at FHA refinance for my primary residence recently because rates were almost 1.5% less on owner-occupied FHA loan vs my current conventional mortgage until I realized few key points:
1) Upfront MI premium (UFMIP) is @1.75% of loan amount 2) Annual MI premiums (MIP) paid monthly, rates range 0.45-1.05% and depend on loan term, amount and LTV. 3) In certain cases (e.g. LTV > 95% for 30 year term) MIP is paid through full loan term (in contrast to PMI on conventional loans with >80% LTV). So, unless refinanced later one is stuck with MIP for a long period, in contrast to PMI which can generally be waived when quity is build over 20%. 4) Neither UFMIP nor MIP are tax-deductable. Neither PMI, though.
Investor · Reseda, CA · Member since 2016 · 14 posts · 5 votes
10y
I am a lender and have come to the determination that using an FHA loan to buy your first property is a fantastic opportunity that should not be passed up on. It's the opportunity to get into a rental (after you live in it for the required time) with very little money down. As long as the rents cover the payment and you cash flow a little, does it really matter your rate of return? You'll own that property free and clear if you keep the loan to maturity. I'd say skip the condo and look for a 3 to 4 unit property to buy with your FHA loan. One you buy your first home, the possibility of using 3.5% down will be much more difficult (in the same market you live in) due to FHA rules, etc. You buy one property with 3.5% down and still have the money to make another investment. What could be better?
Fair Lawn, NJ · Member since 2016 · 12 posts · 1 vote
10y
Yea, my condo just fell through. Sellers canceled contract while in attorney review. Maybe it's a good thing.
Multi unit house is interesting, however where I live, a 3 apartment house costs at least 850k. Not sure if the bank will approve. I got pre approved for single house at up to 600k.
Yea, my condo just fell through. Sellers canceled contract while in attorney review. Maybe it's a good thing.
Multi unit house is interesting, however where I live, a 3 apartment house costs at least 850k. Not sure if the bank will approve. I got pre approved for single house at up to 600k.
Fair Lawn, NJ · Member since 2016 · 12 posts · 1 vote
10y
but the only reason in my situation t go for FHA loan and eat the PMI is if I am going to invest the rest of my 100k. If not, it would just be stupid for me to go the FHA route.
So if I am paying extra $200/mo PMI i better find properties that will cover it and some
but the only reason in my situation t go for FHA loan and eat the PMI is if I am going to invest the rest of my 100k. If not, it would just be stupid for me to go the FHA route.
So if I am paying extra $200/mo PMI i better find properties that will cover it and some
Fannie/Freddie loan limits are the same in that county. :)