Pay my home down and lose PMI or buy an investment property?

Question

I am currently paying PMI on my primary residence.

I am a novice here, but am I better off paying down my house and losing the $300 a month PMI, or taking the money I have in the bank and buying a rental? I'd make $300 a month from the rental, and it is brand new with a 1 year warranty, so maintenance costs would be delayed for a bit.

Thanks for advice!

Sarah Ziehr · Answer

First question to answer is if you are able to purchase an investment property based on your current DTI. You will also need 20% down minimum.

Personally I would pay off that PMI unless you found an income property that was bringing in more than $300 per month.

Rachelle P. · Answer

You folks are all brilliant. This is my first rental, so you are giving me so many points of view and a lot of things to look at and think about. This is great!

Becca Summers · Answer

Has the value on your property gone up enough since you purchased it to refinance out of PMI?

Also with the new property have you accounted for vacancy and cap x in the $300 a month cash flow.

Ehab Shoukry · Answer

I like the idea of the rental that makes $300 a month for the following reason.  Let's look at it this way.  Let's assume you pay down your mortgage so you don't have to pay PMI...now what?  You don't have any money to invest.  Now you are just waiting around still not investing until you save enough money to put a downpayment on a rental one day.

Conversely let's say you buy the rental that makes $300.  You take that $300 and apply to the principal of your primary residence and pay down the mortgage faster so you're not paying PMI sooner rather than later.  At least in x number of years when you have 20% equity in your home and are not paying PMI, you still have the rental that is making you $300 a month.  And if you really wanted to, you could start saving that money to help you get that next downpayment to buy another rental.

Just my thoughts.

Ehab

Sarah Ziehr · Answer

Oops, I meant Rachel! I see you are from Sandy, Utah. :)

Sarah Ziehr · Answer

Hi Sandy, How in love are you with your current property?

One idea would be to find a new home for you to move up/into- and rent your current property. Right now you can move into a new home with just 3% down which would give you more money to pay down your equity (and PMI) on property #1. You could also sell property #1 within the next 4-5 years and avoid paying capital gains= more money to invest with.

If that is not an option for you then I still say pay off that PMI unless the rental property is in an appreciating area.

By the way, did you know you can "buy out" your PMI instead of putting 20% down? Ask your lender about that on your next purchase to see if it makes sense for you.

Rachelle P. · Answer

Sarah

Thanks and great point. I have the down, DTI is good, and I am already approved for a loan. This property would generate $400 a month income, currently.

Rachelle P. · Answer

Thanks, Connor and Ryan. This gives me some interesting perspective. Connor, this concept of keeping the least amount of equity is a good thought and very timely as I am also deciding whether or not to put 20% down or 25% down.  This, in my mind, settles the question. For me, 20% sounds a lot better. And Ryan, great point about protected assets.

J, yes, This is the reason why I am asking. If I can pay down my mortgage and get RID of PMI, am I better off than buying an investment property? So, I definitely know that money is for them and not me. I could put that amount toward the principal instead, right? Keep my payment the same.

Jeff B. · Answer

hmm;  Do you understand that PMI protects only the lender and there's no benefit to you????

Ryan Baker · Answer

I think this completely depends on your situation.  Just another perspective:  In most states your house would be asset protected, so it's untouchable to creditors or suit.  The problem is, you're obviously tying up a lot of cash in one place.  Ideally you could invest, take your proceeds from investing, and put it towards your home.  Then you have a primary residence that is a "asset protection account" and appreciating, while your rentals are less attractive to creditors since you have relatively little equity in them.

Pay my home down and lose PMI or buy an investment property?

Most Popular Reply