Buying my first vacation/investment property loan question

14 Replies

I have a primary residence in which I'm about 20k from getting to 80% of the original purchase price. We originally put 5% down when we didn't have as much cash reserves and have been paying PMI since. Our financial situation and cash reserves have changed quite a bit over the last couple years and we are looking at buying our first investment property/vacation rental.

Currently I’m planning on talking to my bank about getting approved for a second loan as we are starting a search for our second property.

We will have the 20-25% down for the second property/loan, but my question(s) is around the first loan on my primary residence and what I should/can do there:

1. I’m assuming I will have the pay the 20K to get that loan to 20% of the original purchase price to qualify for a second loan?

2. After I pay that, I would be eligible for: A. Not paying PMI; B. Potentially Recasting and improving my monthly cash flow by 300-400 per month and not going through the whole process and expense of refinancing C. Refinancing down to the lower rates (at about 4% on my loan currently)...(the home has also appreciated about 35% from the original purchase price through some upgrades we've made and market conditions ) and potentially pulling my 20K out and then some if I wanted (I'm not eligible for a refinance and avoiding PMI until I pay down to 80% of the original one so that's why I'd have to pay the 20k first)

Not sure what the best approach here is and would appreciate any insights and previous experience or any correction to my thought process above.

Thanks!

Josh

@Collin H. Analysis paralysis so I posted it here haha! Maybe just pay down the 20k on my primary residence (assuming I have to?) and then recast to save some money on monthly payments... seems easiest/quickest and I won't spend extra in closing costs... and I don't need to pull out money from my primary with a refinance right now so I could always do that later with my equity or if cash got tight...thoughts? Maybe there isn't a right answer here and it's about taking action?

Hey @Joshua Carr , I am not sure you are ready to buy a property just yet.

As for the PMI, how long have you had that loan? Getting PMI removed can be a chore. PMI will automatically drop off when your loan to value ration hits 78%, not 80%. You can request it once you hit 80% but many lenders will not allow it. Plus you have to have an excellent payment history. Nothing in arrears.

Of course a ReFi is one way to get rid of it. You said you are not eligible for a ReFi, why is that? If you have the 35% appreciation (according to whom?) then you should be able to ReFi with little fanfare. You might be able to talk to the lender and get a no cost ReFi if they offer it.

https://www.bankrate.com/mortg...

You said you have 20-25% for the down payment on the new property? What does that mean? How much are you looking to spend? Where are you looking for a place?

@Joshua Carr I mean the following with much love and I'm very proud of you for finding us and having the guts to ask questions.

You're a bit all over the place so it's hard to make heads or tails of these questions. I think you'd be better suited to ask one question at a time on the correct forum. None of these questions have anything to do with short term rental other than the fact that you may want to short term rent the new property?

You can totally get a second loan with less than 80% LTV on your current property. No bank is going to care about that.

You seem fairly young, I would not give a flying crap about the PMI at the moment. It'll take care of itself as you build. Get over that.

Feel free to hit my profile and schedule me for a 15-minute call I'm happy to answer all of your questions and offer advice. 

@Michael Baum thanks for your input, time, and questions responding to me.

I've got a good credit score (750+), never missed a mortgage payment, or any payment for that matter, etc.

Had the loan for about 3 years... my financial situation has drastically changed/ improved since then...the mortgage individual we spoke with when we got then loan from BOa said that because we started with PMI that we couldn't get out of it by just refinancing with home appreciation that we would have to pay it down with our own funds to 80% of the original purchase price/appraisal. It's written in the mortgage contracts hat it goes away when we get to this amount.

The appreciation is due to my interpretation of comps (homes that have sold in our neighborhood and area). Maybe that’s not exactly right but it’s not off by more than ~5%.

Looking for something in FL from the 600k -800k range. I now have enough for a down payment, enough cash reserves/w2 income to cover the mortgage/maintenance costs if we didn’t rent it out or something went wrong where we couldn’t ..I.e. beaches closed because of Covid (but definitely want to rent it out for income/cash flow).

I would save the 20k for the next investment and not worry about the PMI.

You should be able to make more money than what you would save on PMI if done properly.

@Luke Carl hey thanks Luke... I posted in the loan mortgage forum, but didn’t get any hits. Hence, my post here which has gotten more attention. I think you’re right I am all over the place, but I think my analysis paralysis is driving that so I’m looking for a “right answer”. Appreciate the opportunity to connect.

Best,

Josh

I'm no expert but will provide some thoughts as I am looking to contribute to this forum more as I am about to stand up my first 3 vacation rentals, and this place has been very motivating and helpful.

1) Your primary is not related to your second home, so remove it from the equation and solve that problem.

First I would ask if your loan holder if you can get an appraisal to remove your PMI. That would make things easy.

I would actually probably skip that and go straight to a no cash out refinance. You will go from 4.0% to ~2.8%, and lose PMI in the process. So cash flow will be more than the 300-400 you expect and it will cost you less than the $20K you are talking about, and pay dividends for the remainder of the loan. I would actually consider shortening the term of the loan, say to a 15 years. youl'l get a lower interest rate and guaranteed cartwheels 15yrs from now.

I would then go take a HELOC on the property if you wanted to tap the equity at low rates since you only have to pay on what you use.

Thats really the only problem you have to solve. Your other problem is going to find a good investment, in FL or anywhere. And most of us have that problem. But I did hear your second home can be 10% down, starting to look into that now, just make sure it's a cashcow.

Hope that helps.

@Joshua Carr , so the no refi to remove PMI is a BoA rule most likely. What is your interest rate? A refi with another lender with an appraisal will get rid of the PMI.

So you have roughly 200k ready to go? Do you need to get rid of the PMI to make your debt to income ratio? How much is PMI now?

What you have to look at is how much will you pay in PMI vs the costs to refi. Plus opening up 2 mortgages could be problematic. It is possible you could work with a single lender and do a package on both.

Like @Collin H. said, there are a few moving parts that need to be resolved.

Personally I would do what @John Underwood said and just keep the PMI and use profits later to pay down the mortgage. If you need the PMI to make your debt/income ratio, then you need to reevaluate your purchase price.

Really appreciate your input/response. I honestly never thought about switching lenders to get out of the refi/PMI "rule."Thank you for the counsel.

My PMI is 70 a month... not huge but I don't love the fact that it is unnecessary given my financial situation and I could get rid of it easily... but I would love to keep 20K in the bank to do other things with if they let me

Yes I have enough of the $ you mentioned...

I don’t think I should have a problem getting two mortgages but do agree with you that keeping cash would be the best option. Really appreciate your input to a newbie haha ... Josh

@Joshua Carr

I am near Anna Maria Island, Longboat Key and Siesta Key. With your purchasing budget you can get a great ROI with a vacation rental. I would move forward with getting approved for the second home because it will move you further along than removing PMI of $70.

Let me know if you have any questions about the area!

Ok@Joshua Carr , just forget the PMI. That $70 isn't worth going to all the trouble at this time, IMHO.

Don't sweat that small of a detail. Spend your time finding a place and getting that rolling.

You can deal with the PMI after that.

@Luke Carl has some places down in FL and is an expert at it. Avery can help as well.