HELP - What should I do? Refi now or later?

Question

Hi everyone,

I am not sure what I should do here- refinance now or later?

The scenario:

I bought a 4-unit property in 2019 with an FHA mortgage that I have been house hacking. I did an FHA streamline last year and was able to reduce my monthly payments by nearly $900. Now I am contemplating doing a refinance into a conventional mortgage but I need 85% loan to value to do so. My appraisal came back at $850k and I owe ~$740k on the loan. This means I will have to pay ~$17k out of pocket to pay down the mortgage to get to 15% equity. My closing costs are $21.5k. Is it worth paying $38.5k out of pocket to save $600/month on PMI?

Other benefits of a refinance now:

-Can refinance while interest rates are low (being offered 2.99%)

-Can refinance while I still live in the property (plan on moving within a year and owner occupied rates are lower)

-Can remove my partner's name off the mortgage and make him eligible for an FHA loan in the future (to buy another 2-4 family with 3.5% down)

-17k mortgage pay down is technically money in my own pocket

-I will get a tax break on some of the closing costs paid

My thought process is that eventually I have to refinance out of my FHA mortgage to go conventional to get rid of PMI (even if I was at 80% LTV). Should I do it now to free up the option for another FHA mortgage with my partner while also reducing my monthly costs aka increasing my cash flow?

Any thoughts/tips/advice?

Mary Baccellieri · Answer

Hey @Brad Sneckner - thanks so much for your response. This is definitely a property I plan on keeping for 30 years or maybe until the return on equity falls below 9%/8% but I have a long way to go until that point so I am definitely playing the long game here. I agree, the closing costs are ridiculously high but I think because it's a special case scenario like you mentioned and because my loan balance is still very high. I know that I can write off a portion of it for my tax return so I've decided I will bite the bullet on that. I was hoping my appraisal would come in at least $870k to get to that 85% LTV and not have to worry about paying down the mortgage at all. If that were the case, I would be more a bit more gung-ho about moving forward but now that I have to do this principal pay down, it has me doing a much deeper analysis to make sure this still makes sense. I think I'm leaning towards moving forward with it especially because I would like to free up the opportunity to use an FHA mortgage again to buy another 2-4 unit property with as little money out of pocket as possible.

Mary Baccellieri · Answer

Hi @Caroline Gerardo,

Definitely a long term plan/mindset here. I am not looking to quit my day job or make a quick dollar. I would like to build long term wealth. I am not banking on a tax break but if I do get some cash back even only a $1-2k, that's still a benefit to me, but again, that is not a deciding factor in my decision.

Caroline Gerardo · Answer

This subsequent refinance is a LONG TERM plan, doesn't save in less than 4 years. Best reason to refinance is to get partner off. Worst reason is you think there is a tax break, probably not. (deduct points paid for refinancing generally only over the life of the new mortgage  IRS 504 topic here: https://www.irs.gov/taxtopics/...   Fannie and Freddie require 20% equity not 15 therefore rate is not going to be 2.99  and need a boat more of cash.  I have several lenders who refinance at 85 and 90% Loan to value full doc middle FICO 722 rates around 4.5  APR 4.665 not 3%  (this is not a loan commitment)

Brad Sneckner · Answer

@Mary Baccellieri Sounds like a great property! I agree with Jaron on assessing how long you will keep the property. If you plan to keep it for more than 5 years, I would agree that doing the refi while rates are low is great to minimize your long-term PMI being paid.

With that said, Conventional guidelines require 25% equity on 3-4 unit properties, not 15%. (It's 15% on a duplex though). So perhaps this is a portfolio product that is offered by a specific bank? $21k seems very high for the closing costs generally but if it's a specialty product that could be why.

Mary Baccellieri · Answer

Hey @Jaron Walling - thanks for your input. Between renovations and closing costs for the purchase and for the possible refinance- my total invested cash = $131,500. If I analyze this property as a 4-unit (without me living there), accounting for new lowered mortgage payment, vacancy expenses, capex, etc. my annual income for the property would be $24,000. A cash-on-cash return of 18.25% still. If I don't continue with the refinance, my total cash invested is $92,900. My annual income would be $16,296. A cash on cash return of 17.5%. I agree that I think I need to consider all factors and not just look at the numbers. The scariest part is letting go of so much cash up front but I'm in it for the long haul so I also see how the up front costs now will save me more in the future.

Jaron Walling · Answer

You need to discuss your REI strategy and pick a clear direction. It's not easy so make the numbers decide for you.

$38500/7200 per year PMI payments = 5.5 years roughly. What are your plans for the next 5 years? How much does this affect the cash-on-cash? I assume the property cash-flows otherwise my comment falls on deaf ears.