My background in Real estate would consist of owning my home and 1 rental property, that I break even on, every month. By "break even" I really mean, that my mortgage for that property is covered by the rent, but anything extra, is out of my pocket. Ok, so I'm not really breaking even.
I got into this rental situation because we had an opportunity to purchase an immaculate foreclosure, and needed to cover the mortgage on our previous home.
I found out from the bank that I can drop PMI on my loan if I pay $11K on the mortgage principal. This would reduce my payment by about $225/month.
I can get the money from my 401K (loan). I feel like in this case it would be worth it, since I'd reduce the amount of interest over the life of the mortgage, and increase my cash flow from 0 to abt $225/month.
I understand that this is financial advise and none of you represent me, or can give me binding advice, I am just looking for some input and thoughts from the more experienced people here.
I really do not like the idea of getting a 401k loan, but it may make sense in this situation by eliminating that PMI. You can put that extra cash flow towards paying down your loan and have it done in 4 years, but you'll miss out on 4 years of growth of that 11k in your 401k plan. You'll have to run your own numbers, but consider whether you gain more in keeping the money in your 401k than you pay in PMI.
Are there other alternatives to escape the PMI? Has the value increased, to the point where you owe less than 80%? If so, that may be a way to get the bank to drop the PMI without impacting your 401k.
The $11K would bring me down to the 80% mark, to remove the PMI. My 401k seems to be doing about 3% return per year, so it's not doing stellar, but better than nothing. I also think there are some benefits to the life of the mortgage loan, by dropping $11K on it, that should reduce a ton of interest and shorten the mortgage somewhat.
Why is your 401k doing 3% a year? The last several years should have been WAY above that no matter what the mix of investments.
Also, the 80% mark is where you need to be when you purchase, but when you pay down a mortgage PMI generally doesn't drop off automatically until you hit 78%.
Here is another option. Are there improvements you can make to the home? If you improve the home and have it re-appraised at a higher amount you might be able to have the PMI drop off that way, or at least have to pay less to have it drop off.
Keep in mind, "breaking even" isn't horrible because you are paying down the mortgage and you can depreciate the house on your taxes. So, you are gaining more than it feels like on a month to month basis.
I would probably just sell it. No way I would take out a 401k loan for it. If you need a 401k loan for the $11k what are you going to do when it needs a major repair, new roof etc?
@Kevin Sobilo , that are some good points. I am not sure if the 11K takes me to 78% or 80%, but when I spoke with the bank, that's the amount they told me that my loan required to auto-dump PMI.
I may get the house re-appraised, since I did replace all the carpeting, and mismash of flooring on the first floor with some pretty nice hickory laminate a few years back. I am not sure that the finished basement was part of the original appraisal either.
I will add that, when I asked the bank about having an updated appraisal sent to them to show the homes current value, they skipped right over addressing that. I guess they are in business to make money.
@Walt Dockery , I would love to sell it, but unfortunately there are enough foreclosures in that area/neighborhood, that I'd only lose.
Get an unsecured personal loan or a personal line of credit . 11 grand is not enough money to lose your butt on
With a loan from your 401k, you pay yourself back interest, so no harm, no foul there. Getting rid of a $225 insurance bill is a no brainer. And who knows, if the market tanks next year and you're earning 3% on your money, it may be viewed as genius diversification. I've always felt that if someone is paying a mortgage for me, they are contributing to my retirement - my virtual "401k".
Get rid of that PMI is my advice. Keep the house - it's working for you.
@John Beck I would not personally hold onto a property like this for too long. It wasn't bought/evaluated as an investment and shouldn't be held as one because frankly, the numbers may seem like they are working now, but once you run into issues with vacancy, cap-ex (roofs, HVAC, Water Heater, flooring, plumbing etc.), regular maintenance, property taxes (no more homestead exemption) and things of that nature it will hurt. Tenants don't prioritize keeping your property in good "health".
I would evaluate where you stand in regards to large cap-ex expenditures and then you hold 1-3 years if you think the roof, AC etc will hold up. This will allow the tenant to pay-off some of your mortgage. I would throw extra cash into it for those 1-3 years every month to help pay it down. That way you aren't having to come up with a big chunk of money. Pray for some market appreciation (there is risk here of the market going south but it may be worth the risk) and get out.
On a side note, make sure you are charging market rent for this place. This is huge for you. Raise rents if they are low. Are you near a tourist area? Maybe short term rentals could pull in more for you. Just a thought from the income side.
@Jay Patel , that house is about 25 mins from National Harbor (DC Area), and 45-1hr from Washington, DC. I am also 10 mins from 2 military bases, and was considering Roommates.com to get military people, to use their housing allowances to rent rooms.
My tenants still have 3 years left on their lease. We are charging market rent for the area, for a 3BR/4.5 Bath house.
I am a CPA and a CFA charter holder. I've done audits of 401K plans in the past too. Under no circumstance would I advise anyone to take a loan from their 401K to pay for their loans/mortgage, especially with the current low interest rate environment. With where the stock market is going, you may get lucky and not have to pay back much on appreciation of your asset in your 401K, but you never know if the stock market somehow sky rockets 20%, you'd be paying back a lot more to your 401k than what you would have saved from the interest decrease on your mortgage.
Like what others said, I would recommend that you sell the property. Perhaps if you can do a nice rehab, you can turn it into a flip property instead. hope that helps.
How long would it take you to save up $11k? You could take out a credit card cash advance for a 3% fee ($330 on $11k) and ask your current credit card if they have a 0% APR option for 12 or 18 months. If you are a responsible user of credit cards and you were confident you could pay off the $11k credit card bill in less than 12-18 months I would just do that. Using the $225 a month you would be saving on PMI and paying down the $11k credit card balance would get you almost halfway to repayment right there. $225 x 18 months = $4050
Also I would look at what your 401k is invested in. If you are talking about 3% so far this year or last quarter then that's OK... but an annualized 3% return is pretty poor performance.
@Michinori Kaneko , the house is in really good shape, paint is good, floors are less than 3 years old (laminate and carpet). Renters are solid payers also. I have about $50K in equity, based on the 2009 appraisal, but that was pre-flooring and work we did while we lived there, so I should get an updated appraisal, prior to any next steps.
So then it all comes down to few variables i think:
1. how much your monthly principal repayments are (this is essentially your non-cashflow gain).
2. How much deductions are you getting on your tax returns on this property (interest/depreciation).
3. How much are adhoc out of pockets you need (shouldn't be much since house is in good condition).
4. How much are you paying extra on PMI ($225)
If the sum of #1 and #2 are greater than sum of #3 and #4, you are actually still making money (+ any appreciation on the property if any). then it becomes question of opportunity cost (if you sold the house today and invest that money on something else can you get a better return - and the answer is probably yes). This is the most important thing, and based on what you wrote, for the same $50K equity you have, you can probably find something that generates better returns.
Hope this helps.