Updated over 10 years ago on . Most recent reply
Help with understanding "gained equity"
Hi all - I am closing on my first rental property this month; a duplex with FHA financing. It is $170k with a 3.5% down payment. It brings in $2000 a month in rent, which I will only be getting $1000 a month for the first year since I am occupying. Will get a lenders credit to do away with the initial FHA fee tacked on at closing, and will be financed at 4%. I plan on refinancing in a little over one year to a conventional mortgage and repeating the process; however, I am unsure on two items, and really hoping someone can assist:
1) I am not familiar with how the interest to mortgage payments are worked out. I am under the impression that the first couple years will be almost entirely interest payments on the loan. Accordingly, I doubt I will have anywhere close to 20% equity at the end of the first year and a half through applying the rent to the mortgage and interest. Question 1: Can I refinance after a year from FHA to conventional even if I do not have 20% equity in the property? And if so, would I have to refinance AGAIN if I wanted to get rid of PMI when I hit 20% equity or does that automatically get taken off?
2) I have a very good understanding of rental income after expenses and what my annual cashflow would look like, calculating generous expenses in. However, I am having a difficult time determining how much equity I will actually be gaining, which is one of the main attractions for me as a 27 year old and going the FHA route.
The numbers:
If I am bringing in $2000 a month in rent for 10 years, and expenses end up being $1700 total, for a $300 cash flow, I would like to have a general idea of how much equity I will have built up.
Assuming that I make the $800 mortgage payment a month, and apply the $300 in cashflow to that payment as well for a total of $1100 a month going toward the loan amount, could anyone give me a general idea of how much equity I would have in the property after 10 years or 20 years? Let's assume no property appreciation or annual increase of rent or expenses. The calculator seems to not factor in everything I want for purposes of equity (e.g., accounting for interest up front, and how much you are applying to the loan amount).
Thanks so much for any thoughts!
Most Popular Reply
What you are looking for is a amortization schedule. See the attached.
http://www.mlcalc.com/#loan-164050-30-4-4-2015-mon...
You pay down 236/month on the loan with it slightly going up every month. I would just bank the cash flow and try to get a low down conventional loan for the 2nd property.