The fastest way to eliminate PMI?
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.
Am I approaching this the right way?
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.
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.
@Justin Jolliffe I wouldn't worry so much about interest rates when you refi. Your primary reason for doing a re-fi is not or at least shouldn't be to drop PMI. Most true investors do either a cash out refi long before PMI is going to be a factor, or sell the house. The tenant pays the interest anyhow. Your objective in a refi is to pull cash back out of the property. The average loan life for an investor is 7 years. If you want the PMI off the loan then make principle payments until it reaches the required equity. The few loans I have had that require it the premium has been about $30 a month. That's small in the overall picture. The rate is affected by your credit, loan amount, among other factors. The payment amnt should be disclosed to you prior to closing the loan. RR
@Ralph R Please see guidelines from Fannie Mae for automatic termination MI ( not lender specific):-
| If the mortgage loan closed... | Then the MI is eligible to be terminated... |
|---|---|
| on or after July 29, 1999 and is secured by a one-unit principal residence or second home | on the applicable termination date, provided the borrower’s payments are current on the termination date.The applicable termination date is
|
The 2nd option you ask about making extra payment ( Fannie Mae guidelines not lender specific):-
Borrower-Initiated Termination of Conventional Mortgage Insurance Based on Current Property ValueIf the borrower’s written request for termination includes the information necessary to reach a decision, the servicer must evaluate the request based on the following:
1. Verify the LTV ratio, or CLTV ratio if applicable, of the mortgage loan meets Fannie Mae’s eligibility criteria.
Satisfaction that the mortgage loan meets the applicable LTV ratio or CLTV ratio eligibility criterion must be evidenced by a new appraisal based on an inspection of both the interior and exterior of the property and prepared in accordance with Fannie Mae's appraisal standards for new mortgage loan originations. The servicer must select an appraiser, order the appraisal, receive the results directly, and send a copy of the appraisal to the borrower.
The following table describes the LTV ratio, or CLTV ratio if applicable, eligibility criteria.
| If the mortgage loan is... | Then... |
|---|---|
| a first lien mortgage loan secured by a one-unit principal residence or second home | the LTV ratio must be
|
| a first lien mortgage loan secured by a one- to four-unit investment property or a two- to four-unit principal residence | the LTV ratio must be 70% or less, regardless of the seasoning of the mortgage loan. |
@Harjeet Bhatti ok I stand corrected as far as the % of loan equity is concerned. It could go as high as 22% by Fannie May standards but commercial loans generally want 25%. No PMI required usually. You are making the assumption the lender is not using any type of overlay here. The lender must adhere to Fannie Freddie minimums but may make more stringent requirements such as requiring more reserves, larger down pmnt etc. through the overlay. Can they not also make the requirement for PMI more stringent? It also begs the question why would you go through the process (and expense) of re-establishing the property's LTV, once again it's the loan not the property. paint and raking the yard won't effect the appraisal that much you gotta hit an LTV of somewhere between 70 and 80% depending on your circumstance in Order to lose the PMI. an appraisal is between 6 and 8 hundred dollars in Colorado and $1000 in Alaska, And if you miss the correct amount it's money wasted. Besides all that we both know that 2 different appraisers will get two different values on any given day. Your gambling on an appraiser. I'm missing the point here. If the property had a 70% or 80%LTV and you were going to do all that to prove a new LTV why wouldn't you do a 70 or80% refi and drop your payment down?? 95k ($100,000 with 5% down) 30 year 4.5% note = a payment of $481P&I + PMI. $80,000 (same loan after 20% down) = $405 and no PMI. If you could prove a 70% LTV you would be better off yet. The difference would only be the loan closing costs. (Tittle insurance etc.) or wait another couple years and get some cash back at the same time. Why wouldn't you do that?? RR
@Justin Jolliffe that payment seems a little steep, but I wouldn't know. Haven't had to deal with PMI yet?
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.
When talking to this lender, did you clarify that you are purchasing a multi-family unit? I called many, many lenders over the last few years and was told by all of them that for conventional loans on 2-4 unit properties, 20% down was the minimum required. If that's changed, I'd definitely like to know.
@Ralph R. I am not an expert in commercial lending. The only thing I can suggest yes, the better way would be cash out if you have equity and take out the PMI also. But this is not true in all cases. Some time it would wise to drop the MI according to set period of time because of interest rate. Situation change scenario change. I understand cost of appraisal is high but compare the saving and see if its worth spending that money.
You can never get rid of FHA pmi unless you refi. in order to do that you need to improve the value of the property. If it is owner occupied, the value is mostly on the comparable sales and the condition of those sales. Commercial is a whole other story based on NOI.
@Harjeet Bhatti maybe I have a twisted view point. If I get an appraisal I pay that out of pocket. Direct loss to me. The tenant however pays the mortgage when he pays the rent. I look at it like he's paying interest not me. It's my job to get him the best rate I can but it's his expense. The real money in RE is from value add or appreciation. Appreciation is a gamble. Don't count on it ever. Actually that brings us to why we need a good deal to begin with. You always make your money when u buy. I view the tenant as my Place holder. He pays all the expenses while I try to make real money on the property. I don't view him as a source of cash flow. He is just paying me my original down payment back at $100-200 a month. It takes him years to give me my money back. His real value is paying all the expenses while I try to increase the value of the property somehow Cash flow pays the bills, value add or appreciation builds wealth. Equity is stagnant cash. you can't spend it or build wealth with it. The only 2 positive things about equity is if the market or rent falls it is your safeguard, and it's all paid for by the tenant. (Except your down payment). All equity (save for your down pmnt) in the property actually is the tenants money because he made the payments. You manage equity like anything else. Too much equity and you miss opportunity. To little (I.E. 5% down loans) and your risk in a tight market goes way up. That's why most investor loans only go about 7 years. The investor either sells or does a cash out refi to get some tax free money ( theirs no tax on money from a loan). See my thinking here? RR
@Ralph R Its a loss if you don't save anything by refinancing but if you save money in your mortgage payment its good. Regarding average consumer come back and refinance or cash out for many reasons. Its not always free money is the reason to cash out. All investors has different way of thinking about investing.