WWYD re: rental refinance

[bkmnky72]

We recently rented our old home which is valued at $330K, current loan $197K.  Current PITI is $1,500.  <27years left, 4% apr.

The main goal is getting PMI out.  It's cash flowing at +$350 a month before expenses (currently we only pay $35\month in gardening).   We may sell most likely in the next few years, and put that money towards a new duplex/4plex.  But definitely not something that we're ready to do real soon, since we just moved in to a another house that takes up a lot of our free time, and we'd feel really bad if we sell within a year and force the tenants to up and leave again if the potential buyer moves in.  We may also just hold it for eternity.  It's not an ideal location which is the reason why we moved.  If we have to pick a rental, it's likely not going to be our top neighborhood choice.  It's <10 miles from our current home.  We're in our 30's and 40's and hope to retire in the next 10 years. 

Options:
1.  No cost refi, 4.5%, $1400\month PITI. 
2.  $20K added to balance, 3.25%, $1,250 PITI.
3.  $9K added to balance, 4%, $1,350 PITI.

[Another Reader]

What are the rules for getting rid of PMI on the existing loan?

[Hotstreak]

Honestly that doesn't look like a good rental property, I think you should strongly consider selling it.  Would you buy the property as is and rent it?  If not (and it seems from your post like you wouldn't), then you need to sell.  Lots of good information on the Landlord section of the forums to help you with your decision.

[bkmnky72]

What are the rules for getting rid of PMI on the existing loan?

We were told 78% of the original appraised amount or 11 years, it will automatically drop off.  The original appraisal was about $218K so we're nowhere near it. 

[bkmnky72]

Honestly that doesn't look like a good rental property, I think you should strongly consider selling it.  Would you buy the property as is and rent it?  If not (and it seems from your post like you wouldn't), then you need to sell.  Lots of good information on the Landlord section of the forums to help you with your decision.

Thanks. I'll look into that.  I really don't want to sell right away, since the tenants have been very good. 

[RedmondStash]

You could refinance into two mortgages, a primary and a secondary, then pay the secondary off ASAP. We did that when we bought our house instead of getting PMI -- 10% down, and then 75/15 for the mortgages, I think, or maybe 80/10. The two mortgages spread the risk between two lenders, which made them happy, and not having PMI put control of our additional payment (for the second mortgage) squarely in our hands, which made us happy. A few years later, we were able to refinance into a single mortgage because the home value had increased and we'd paid down the mortgage enough.

PMI is such a rip-off. You're not getting anything for your money except someone else's peace of mind.

[clarkfan1979]

If you are going to sell "in a few years" it wouldn't make sense to refinance. If you refinance and have a larger loan you might be cash flow negative.

[bkmnky72]

Thanks!

[Ebrat]

What are the rules for getting rid of PMI on the existing loan?

We were told 78% of the original appraised amount or 11 years, it will automatically drop off.  The original appraisal was about $218K so we're nowhere near it.

Do you have an FHA loan?  How much is the PMI?

[bkmnky72]

Yes on FHA loan.  PMI is $193

[Ebrat]

Dang!  I think that if you're set on keeping it, you should refi.  The no cost option gives you an immediate $100/mo savings.

I don't understand the person who said a larger loan could make you cash flow negative.  If you're just refinancing the current loan balance (no cash out), your payment should go down, not up.

I'd also recommend shopping around for a good (conventional) loan--it seems like you should be able to get a better rate?  Like something where you pay closing costs but don't put any extra toward the loan.  But even with the no cost, higher rate option you come out ahead.

[TheAnonOne]

Dang!  I think that if you're set on keeping it, you should refi.  The no cost option gives you an immediate $100/mo savings.

I don't understand the person who said a larger loan could make you cash flow negative.  If you're just refinancing the current loan balance (no cash out), your payment should go down, not up.

I'd also recommend shopping around for a good (conventional) loan--it seems like you should be able to get a better rate?  Like something where you pay closing costs but don't put any extra toward the loan.  But even with the no cost, higher rate option you come out ahead.

Not only that, the payment on the mortgage is only 50/50 in the equation. On one hand you LIKE to see a profit monthly, but on the other hand if you had a 10 year mortgage on the loan, surely you would be losing money monthly, but your total net-worth would still be going up (much faster).

Kill the PMI, but explore whatever options raise your networth the most as well.