Large payment to ditch pmi on house hack?

Question

At the end of August I purchased an 1100sqft duplex. 1 bed 1 bath each side. $140,000 purchase price. 5% down. After credit for repairs it cost me 4k out of pocket. I inherited a tenant with a lease until July he pays $500 a month. Water isn't split so I pay that bill.

Mortgage, insurance, taxes, and pmi comes out to $1155 monthly.

I am wondering if I should make a large payment of $22,880 in the next couple of months to reach 78% equity and get rid of pmi that is $158 monthly.

I would like to purchase another duplex in August this year also, which may be feasible even after this large payment.

I'm trying to get thoughts on this action, also guidance on how to analyze the action necessary. Thanks in advance for your response!

Dale K Poyser · Answer

if you can do  both the lump sum and the purchase of another property I would hold on to that lump sum amount and

1 - consider picking up two additional properties

2 - have that lump sum available in case of emergencies. I think cash will be king in the next couple months and having the capital on hand will allow you to take advantage of more opportunities.

Wayne Brooks · Answer

@Jacob Waugh If this was an fha loan, MIP is for the life of the loan, with less than 10% down.  You can only get rid of it by refinancing out of the fha loan..

Joe Splitrock · Answer

Only half of the PMI expense, half the interest, half the insurance, etc. is deductible. Since it is a owner occupied duplex, every shared expense gets split in half. I definitely recommend hiring a tax pro to do your taxes. Owner occupied house hacks are more complicated due to opportunity for error in claiming expenses.

Martin G. · Answer

I would double check the lender doesn't have a minimum waiting period to lose the PMI. When I had my first FHA mortgage, I had a five year minimum requirement to meet as well as LTV percentage. I imagine that this can vary from lender to lender and definitely can vary depending on generation of FHA loan (if applicable).

Since PMI is a deductible expense, I wonder if your 23K would be better deployed elsewhere? Obviously if you have the capital to do both, then great, but the next lender may want to see cash reserves of significance to make sure you can carry both. Some lenders allow retirement accounts that allow emergency withdrawals for this purpose, fyi. I am not a mortgage professional, tax accountant, or attorney.

Also, @Jacob Waugh--is there a reason you wouldn't aim to acquire a 4 family as your next deal instead?

Jacob Waugh · Answer

I am going to check with the loan officer to see if there is a minimum waiting period.

I guess I didn't realize it was a deductible expense. I need to do further research regarding taxes.

I suppose I had only thought about a duplex or maybe 2 in 2021. I really hadn't given any thought to a 4 unit. It's definitely getting my wheels turning though!

Kenneth Garrett · Answer

@Jacob Waugh

I look at it from two perspectives. The tenants are currently paying your PMI so it doesn’t cost you anything.  If you paid it, the return on your money is about 8%.  Not a great return.  I agree with @Martin G. you probably have a waiting time in order to be rid of PMI.  Some FHA loans have an 11 year wait while others are for the life of the loan.  Read your documents on PMI requirements.  I prefer to hold onto the cash and use it for another property.

Wayne Brooks · Answer

@Jacob Waugh Typically there is a 2 year minimum time required and 75% LTV required if within  5 years.

Jacob Waugh · Answer

It is not an fha loan. It is a conventional loan from a Credit Union.

Dale K Poyser · Answer

i thought with FHA loans the pmi was for the life of the loan?

Martin G. · Answer

@Jacob Waugh A fourplex would be much more efficient to manage than two duplexes. You would do less driving around to check on things. Additionally, certain capital expenses would go down (one roof vs. two, one yard to maintain vs. two, potentially hot water heaters as well). I learned this from listening to a podcast with @Ben Leybovich. It was a total game-changer. I remember exactly where I was standing in the gym when I heard him say it. (I do a lot of standing around in the gym; beats working out!)

Large payment to ditch pmi on house hack?

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