Investor · Leominster, MA · Member since 2017 · 17 posts · 7 votes
I'll cut straight to the point:
I am purchasing a 3 family to house hack and I want to get rid of PMI as soon as possible. Here are the numbers.
Purchase Price: $335,000
Gross Income $3600.
I have the money to put down 3.5%, even 5%, but which one is better to do? As of right now, I am thinking that placing 3.5% down on the house and putting my leftover money in the stock market, and consistently adding to it every month for a few years until I have a reasonable chunk of change. Then, I can dump it all into the house (Assuming the stock market does well) to reach a 20% equity stake, refinance and eliminate PMI.
I just can't stand the thought of my money sitting there in the house if it isn't working for me. Until I get to the 20% mark, it seems foolish to put it towards the principal other than to marginally lower interest payments. I am betting the stock market will do at least better than that option.
I am purchasing a 3 family to house hack and I want to get rid of PMI as soon as possible. Here are the numbers.
Purchase Price: $335,000
Gross Income $3600.
I have the money to put down 3.5%, even 5%, but which one is better to do? As of right now, I am thinking that placing 3.5% down on the house and putting my leftover money in the stock market, and consistently adding to it every month for a few years until I have a reasonable chunk of change. Then, I can dump it all into the house (Assuming the stock market does well) to reach a 20% equity stake, refinance and eliminate PMI.
I just can't stand the thought of my money sitting there in the house if it isn't working for me. Until I get to the 20% mark, it seems foolish to put it towards the principal other than to marginally lower interest payments. I am betting the stock market will do at least better than that option.
Am I approaching this the right way?
Find someone local to you that offers Freddie Mac's 95% conventional LTV 2-4 unit program and will do a side-by-side.
FHA advantage: "Only" 3.5% down. DTI can sometimes be up north of 50%.
FHA disadvantage: Mortgage insurance is there for the life of the loan (you can refi to drop the MI, but what if rates at that point are back to historically normal levels of 7% or so?), and 1.75% UFMIP gets tacked onto your loan balance. 3.5% down + 1.75% UFMIP = 5.25%. FHA "self sufficiency" test can be a dealbreaker that does not come up until 2-3 weeks into the process.
FHLMC advantage: No funding fee tacked onto loan balance. PMI can be cancelled without needing to refinance, keeping the rate you locked when you purchased (this makes discount points more viable -- lock in a killer permanent rate while rates are low, keep it when you drop PMI!). Offer is seen as more attractive by listing agents. Your 5% down is 5% towards equity, there's no 1.75% getting tacked onto your loan balance.
FHLMC disadvantage: "Larger" 5% down (but still less than 5.25% big picture). PMI is more expensive with bruised credit. Normal DTI requirement.
Rental Property Investor · Charlotte, NC · Member since 2017 · 26 posts · 8 votes
9y
Hi Justin,
Well at least you are on the right track of thinking about getting rid of wasted money! We are in Anchorage and have been able to successfully grow our business by purchasing dated properties, updating them and refinancing the next year. With time and looking for the right deal you can find homes that have a little bit of equity and with a little bit of forced appreciation you can accumulate the 20% needed to refinance.
It sounds like you purchased this home and are considering where to invest your money. I also think it depends on where you want to go. If you are thinking of buying more homes, you may want to consider putting this one in a conventional loan.
Best of luck!
Investor · Leominster, MA · Member since 2017 · 17 posts · 7 votes
9y
Thanks Ozzi and Stephanie,
Stephanie, wouldn't a conventional loan require the 5% down payment? What would be the advantage of placing the extra 1.5% down? I know that an FHA loan requires you to live in the property for a period of time, but I already plan to live in this property for another two years or so.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
9y
@Justin Jolliffe It doesn't matter what kind of conventional loan you get for non owner occupied properties Its going to require 20% down, and PMI becomes Moot. a commercial loan requires 25% down usually. be sure to deduct the amount of the PMI from your "profits" in the stock market, otherwise paying PMI while you invest enough to bring the the loan up to the 20% requirement is foolish. like charging a bill to a credit card if you have cash enough to pay the bill. Pay 13% interest on the Credit Card and investing the cash you have left from not paying the Bill
Your rental investment will be a little safer if you have some skin in the game. When the market crashed my one rental I had at the time had 100% financing. I was forced to rent it out at $100 dollars a month below the monthly mortgage payment. I did that for several years until the interest rate fell and I could refinance and put some down payment in to stop the negative cash flow. I lost my butt on that deal, and learned just about every hard knox lesson there was. It finally went up enough I could refinance and get my cash back. (10 years)
Todays mortgage payment is $600 a month rent is $1250, and I took $21K out (The amount I infused to get the payments down) for another down payment on another rental. The renter put that money in equity for me. Your ROI will drop with a higher down Payment, but you will have a little more breathing room between your rental income and your bills. (Less Risk) in effect when you collect rent every month its the tenant paying you back your down payment a little each month. The stocks don't do that. (unless you get some kind of dividend) The dollars you put in the stock market loose buying power each day. Don't forget to subtract that from your stock market profits. IE an investment that yields a 10% return for one year only "gains" a portion of the profit you gross when you sell the stock. It looks like this (Profit your investment gains) - (time value of money or 2-3%) - (cost of your PMI) - (your loans interest rate on the amount you use to buy your loan down) - (taxes)= NET gain on the investment you are talking about. The rental gives you a tax advantage, so that's another reason to look harder at paying the higher down Payment. (or investing more in the real estate) eventually the tenant pays you the down payment back. The money in the stocks is stagnant (UNLESS its paying you a dividend) while they are invested in the market.
Don't misunderstand me you can do as well or better in the market as in Real estate but you need to fully understand what you are doing. Putting that money in a mutual fund most likely won't yield enough to beat the rental investment. Find out what the 10 year average yield is than subtract your PMI cost, Time value loss, and applicable taxes and interest you will save on the loan and see for yourself. Trouble is now you have a refinance charge to subtract from your potential savings by buying the loan down. (Some FHA loans require a refinance to drop the PMI) That re-finance charge (If your loan requires it) is the price of learning this lesson. now you need to figure out which way you need to go. Chalk that one up to lessons learned! :)
Investor · United States · Member since 2015 · 415 posts · 487 votes
9y
Justin, I believe you're thinking about it the right way (although I personally feel the stock market is valued pretty high right now and would say it's far from a sure bet to beat paying down your loan). But logically, you're approaching this the right way to allocate your money in the most optimal way. And looks like you have a good deal on the rent vs. price ratio.
Conventional loans can only be used on 2-4 unit properties with at least 20% down. So for your triplex, you'll have to use FHA unless you have the 20%.
As a side note, one great way I have gotten around PMI is by purchasing owner-occupied SFR's with 5% down conventional loans, which require me to live in them for at least one year. On those loans, you can have the option of either paying monthly PMI or what's called "single premium mortgage insurance", which is a large one-time payment (mine were around 2 points). I opted for the single premium and negotiated for the sellers pay it, thus getting a 5% down loan with a great rate and no PMI. The house hopping was a hassle once a year, but made for a great portfolio.
Real Estate Agent · Chattanooga, TN · Member since 2017 · 71 posts · 39 votes
9y
@Jim D. creative loan strategy is smart for little money in and great return with no PMI. Although moving often is a pain it can be done if you want it bad enough.
Rental Property Investor · Dallas, TX · Member since 2015 · 283 posts · 179 votes
9y
Conventional loans you can place sometimes as low as 3.5 percent down. Depends on the lender. I did a 80/15/5 loan. 5 percent equity. 1st mortgage was 30 year fixed at 3.4 percent. 2nd was 15 year fixed (at 15 percent LTV) at 6 percent interest.
This eliminated PMI which is not tax deductible and allowed me to gain some tax advantage while having a shorter payoff (15vs 30 for the second).
Payments were basically identical to doing a 95/5 loan with PMI
Rental Property Investor · Dallas, TX · Member since 2015 · 283 posts · 179 votes
9y
Oh and the fasted way... invest in an emerging market, and find a place that needs work so you can force appreciation.
If done right you should be able to get PMI off in 8-12 months
Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
9y
It will take 111 month to cancel under conventional with 5% down payment. If you keep 5% down payment under FHA it won't cancel even though you will have 22% equity. You have to put 10% down under FHA to cancel the MI.
Investor · Leominster, MA · Member since 2017 · 17 posts · 7 votes
9y
Why would it take 111 loans to get rid of PMI now? I'm sorry I don't understand that point yet. I thought it was at a 20% equity stake, not a time limit.
I am purchasing a 3 family to house hack and I want to get rid of PMI as soon as possible. Here are the numbers.
Purchase Price: $335,000
Gross Income $3600.
I have the money to put down 3.5%, even 5%, but which one is better to do? As of right now, I am thinking that placing 3.5% down on the house and putting my leftover money in the stock market, and consistently adding to it every month for a few years until I have a reasonable chunk of change. Then, I can dump it all into the house (Assuming the stock market does well) to reach a 20% equity stake, refinance and eliminate PMI.
I just can't stand the thought of my money sitting there in the house if it isn't working for me. Until I get to the 20% mark, it seems foolish to put it towards the principal other than to marginally lower interest payments. I am betting the stock market will do at least better than that option.
Am I approaching this the right way?
Find someone local to you that offers Freddie Mac's 95% conventional LTV 2-4 unit program and will do a side-by-side.
FHA advantage: "Only" 3.5% down. DTI can sometimes be up north of 50%.
FHA disadvantage: Mortgage insurance is there for the life of the loan (you can refi to drop the MI, but what if rates at that point are back to historically normal levels of 7% or so?), and 1.75% UFMIP gets tacked onto your loan balance. 3.5% down + 1.75% UFMIP = 5.25%. FHA "self sufficiency" test can be a dealbreaker that does not come up until 2-3 weeks into the process.
FHLMC advantage: No funding fee tacked onto loan balance. PMI can be cancelled without needing to refinance, keeping the rate you locked when you purchased (this makes discount points more viable -- lock in a killer permanent rate while rates are low, keep it when you drop PMI!). Offer is seen as more attractive by listing agents. Your 5% down is 5% towards equity, there's no 1.75% getting tacked onto your loan balance.
FHLMC disadvantage: "Larger" 5% down (but still less than 5.25% big picture). PMI is more expensive with bruised credit. Normal DTI requirement.
Sycamore, IL · Member since 2017 · 45 posts · 23 votes
9y
Justin Jolliffe There isn't a time limit for PMI, I believe Harjeet Bhatti was saying it would take 111 months for you to reach 20% equity given a 5% down payment.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
9y
@Chris Chesser@Harjeet Bhatti was talking about how long it would take to reach a 20% equity position at the normal rate of pay down. Putting extra money against the principle will accelerate this. If the op has a 3.5% loan it most likley is FHA. Newer FHA loans have PMI full term unlike conventional loans that drop the PMI once you reach 20% equity, unless you paid the PMI upfront. Then its a one time payment in points or a higher interest rate. At least this has been my expierance. RR
Investor · Leominster, MA · Member since 2017 · 17 posts · 7 votes
9y
Great info everyone!
Given all of this advice, and the fact that interest rates are so low, I'm leaning towards the 5% down option where I won't need to refinance in the future (when interest rates are higher) to eliminate PMI.
Rental Property Investor · Charlotte, NC · Member since 2017 · 298 posts · 232 votes
9y
What makes FHA loans even worse now is that, unlike old FHA loans, servicing banks are no longer allowed to do discretionary in-house conversions from FHA to conventional to drop the PMI.
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
9y
If you buy right and find something that needs some sweat equity, you can eliminate PMI PDQ. You should be able to spend a few weeks renovating, cleaning, painting, landscaping, etc and get a new appraisal and be done with it. If you are planning on eliminating PMI through pay down and appreciation, that could be a long road. What if the market takes a down turn? If values drop by 10-20% over the next five years, it could be a decade or more before you could get an appraisal to hit that LTV mark.
Investor · Leominster, MA · Member since 2017 · 17 posts · 7 votes
9y
Steve Bracero yes I am looking at 5% conventional.
I will definitely look at renovations after work and on the weekends to try and bring the value of the property up before I get it appraised again. Seems like a great tactic!
Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
9y
@Ralph R When you buy any property with lower down payment its need 22% equity to take out MI from the loan. The figures which I mention is straight from MI company website to take out MI from the loan.
Investor · Leominster, MA · Member since 2017 · 17 posts · 7 votes
9y
Just talked to a lender in MA who said the 5% down conventional would let me call the servicer once I reach 20% to drop the PMI. If I don't call, they will wait until 22% and drop it automatically.
@Justin Jolliffe In my opinion you are thinking along the right lines. Though I would like to add if you do an FHA that restricts you from having flexibility (not letting you drop PMI when you reach 20% equity) I wouldn't do it!!! The ONLY way I would in this case is if that 3,600 you mentioned is the income from JUST the two sides. Meaning you are already cash flowing positively the day you move into the third unit and living mortgage free. That way you can use the extra 1.5% in addition to what you charge yourself in rent ($1,800) and invest that money as you mentioned.
With that being said, my perspective is (with you living in there for a couple of years as you stated) that you put the 5% down, house hack, take the profit from the 2 units and put into the principal. Then use what you would pay into yourself in rent ($1,800) and invest $1,200 a month in investments with $600 being your reserves. This way it could potentially get you to the 20% equity you are looking for a little faster and be able to invest, have cash reserves for incidentals, and drop the PMI when you reach your mortgage mark.
Hope the perspective gives you more or something to think about.
Investor · Leominster, MA · Member since 2017 · 17 posts · 7 votes
9y
JP P. Great advice! And the rent is $3,600 spread across all 3 units, so the rent from the other 2 units is only $2,400. I plan to rent out the other 2 bedrooms in my unit for $500 each when I move in. Fortunately there are 2 colleges and a hospital within 3 miles of the property so if I can't get young medical professionals in with me I will move to college kids. I am 24 right now so I am fine with living with people in my age group!
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
9y
@Harjeet Bhatti@Corby Goade I have had multiple conventional loans all non owner occupied. All requiring 20% down, none of which required PMI. I can't speak as to what point PMI drops off after a loan reaches a given percentage it may well be 22%. It depends on the lender not the MI company. It is after all Mortgage insurance. That is up to the lender not the MI company. It's a lender requirement and is also required by fanny or Freddie if they back the loan. Fannie and Freddie requirements are 20%. The lender could require more. my lender told me Current FHA loans require PMI the entire life of the loan. It no longer drops off after the magic 20 or 22% mortgage equity is reached. It takes a full on refinance to loose the PMI. Conventional loans still can drop off depending on lender requirements. The loan I closed on 2 weeks ago (2nd home, owner occupied, 10% down ) will loose it's PMI when I reach 20% equity in the loan. No appraisal no re-fi no action required. Should I choose to make a big enough principle payment before normal payments dropped it off it would drop off sooner. The required PMI is based on my equity in the LOAN. Not the equity in the property, as Corby suggests. RR.
Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
9y
If there's room for it; Do things to force appreciation in the triplex and add value and increase the rents and add 15%-20% value to the property. Put ~$10k in each unit that adds $15-20k in value. Then refinance the balance and it'll be under the threshold for PMI, and you'll have higher rents.