Q. I am looking into the business of flipping houses and possibly developing some under or non-developed properties. I have a construction background and some close contacts in real estate. To get things going I am looking at trying to flip a $150,000.00 house in under a year with either no money down or very little. What loan would be best for me?
A. We wouldn't want to dampen your entrepreneurial spirit, but before you venture into the business of flipping, we would urge you to take a good, hard look at the market.
Although the housing market is still healthy, it has eased from its lofty highs and flipping isn't the slam-dunk profit that it was just a year or two ago. Right now there is about a 7-month inventory of both new and existing homes on the market. And investors are holding a lot of those homes.
You say you want to flip the home in less than a year, which is a worthy goal, but be sure that you can afford to hang onto it for several months longer just in case it doesn't sell as quickly as you hoped.
So this is one of the few times we’d suggest a no-cost (costs are rolled into the balance), interest-only mortgage. This would require little upfront cash, and would provide you with lower payments.
If you could get a 100% interest-only loan (and they are available), that would be ideal because you would only have one payment and one mortgage to deal with.
Your other option would be to do a piggyback 80-20 mortgage. To avoid paying mortgage insurance, you would want to get an 80% first mortgage ($120,000) and then a second home equity loan for the remaining 20%. Equity loans also come with interest-only payments, so you would be paying the minimum on each of the loans.
Q. Private mortgage insurance isn’t meant to last the full term of the loan is it? When can I ask the mortgage company to stop charging me PMI?
A. No, it’s only required until you have built up 20% equity in your home. Most homeowners reach that threshold through a combination of their home appreciating in value and reducing what they owe through their monthly payments.
Let’s say, for example, you bought a home for $100,000 and borrowed $95,000 to pay for it. You would have only 5% equity in the home and have to pay PMI.
But when the balance on your loan declined to $90,000 and the price of your home appreciated to $113,000 you would have 20% equity and be eligible to drop the mortgage insurance.
To get the lender to cancel PMI you may have to pay for an appraisal ($200-$400, depending on where you live) to prove that you have the minimum amount of equity. But be sure to talk to your lender before getting an appraisal to make sure you know exactly what it will require.
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