Help with understanding "gained equity"

4 Replies

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!

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.

Thanks so much for the amortization schedule. Exactly what I was looking for.

I full intend to bank cashflow after the 20% (PMI is gone). You would bank that cashflow even before the 20% equity and pay the PMI? I still have the remaining question on number 1 - how the refinances work with the FHA. Any thoughts on this? I want to make sure I am not putting myself in a position to refinance the loan twice (first to convert it from FHA to conventional when I move out to the next one, and 2nd when I hit the 20% equity mark). I am not sure if PMI just drops off at 20% or if you must refinance.

You don't have to refinance to drop PMI but you DO have to manually ask the bank to drop it, which is at their discretion.

I have not gone through this process personally so I can't speak on whether or not they will make that process difficult or not. One 1/2 of me says "20% is 20% they should just drop it when you get there and be cool" the other 1/2 of me says "well, if I close on a house that's under 80% LTV they still tack on PMI if I don't put down 20% cash so those greedy vultures might fight me the whole way down!!!"

I'll be trying to remove pmi for one of my properties in the next few months. 

There's been some major changes with FHA rules so the cancellation of mortgage insurance premiums (MIP) may not be as straightforward as going away once you reach a certain equity point and depends on when you got the loan.

Many people have been referring to the FHA mortgage rules dated prior to June 2013. Whereas for a 30 year loan term, the annual MIP cancels once LTV reaches 78% and you've been paying MIP for at least 60 months.

The current rules, however, have changed and are as follows for a loan less than or equal to $625,500:

  • For a 30 year loan
    • LTV
    • LTV > 90%, but
    • LTV > 95%: MIP of 0.85% for the entire length of the loan (30 years!)
  • For a 15 year loan
    • LTV
    • LTV > 90%: MIP of 0.7% for the entire length of the loan (15 years)

Reference: http://portal.hud.gov/hudportal/documents/huddoc?i...

So as you can see, you could be paying that annual MIP for all 30 years of your FHA loan. The way out of course is to refinance to a conventional loan once you have 20% equity.

Hopefully I'm getting these facts right, but @Shaun Weekes has a lot of knowledge with FHA and can confirm or correct me if I'm wrong.

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