Besides PMI/MIP cost, does an FHA increase your monthly payment?

Question

I understand that when you use an FHA loan to reduce your down payment that you are required to carry PMI/MIP which will be added to your monthly mortgage payment but won't putting down a much smaller amount like 3.5% also skyrocket your monthly payment as well? How do you start off house hacking with low down payments like they often talk about without having an enormous monthly payment and killing any potential future cash flow?

Steve Sonneson · Answer

@John Warren Thank you for your input. I'm new to all of this so some of these things are still a little confusing for me.

John Warren · Answer

@Steve Sonneson you are correct on most fronts. The FHA loan is a pretty lousy loan in most ways, BUT it lets you put only 3.5% down which allows a lot of folks to get in the game. One mistake a lot of newer investors make is that they view this loan through a true 30 year horizon. In reality, most investors will cash out refinance or just straight up refinance to a conventional to get rid of the PMI. In most markets where I work, a quality 2-4 unit trades for 300-400k which means you will be dealing with $300 or so of PMI per month. I tell most new investors that the whole game then is to find a high quality building and then look for creative ways to ditch the FHA loan so you can repeat the process a few times.

Your cash flow eventually goes up once you get out of the PMI. Then you let appreciation do its thing and you can get some incredible returns with very little money down.