Primary Residence to Investment Property - Changing PMI Terms

Question

When I purchased my property, it was my primary residence. Two years later, I moved out and began renting this property out. I am now trying to refinance the mortgage on this property, but I am not able to do so because the PMI underwriter will not allow it to be modified to an investment property. I would like to get them to allow this change of terms. I spoke with them on the phone today, and they said it was their policy not to allow these changes. They could allow an exception (maybe), but it would have to come at the request of my mortgage servicer.

My concern is that the mortgage servicer does not care whether this refinance/modification happens at all (that's what they told me).

One thing to note, the loan on the property is ~102% of the value of the home.

I currently have a 7-year interest-only ARM. I'd love to get it to a 30yr fixed. Any advice?

UPDATE: I spoke with my loan servicer. The rep said that nobody had ever actually called the PMI company to inquire about such things. He passed it to his manager. We'll see what happens from there.

Answer 1

You could be in a bit of a bind. I wouldn't push it any more until you read your loan papers very carefully.

Going back to the lender for a refinance after you converted it to a rental (presumably without their knowledge) is risky. I doubt they'd let you refinance anyway, as the house is underwater.

If the loan is performing then I wouldn't think they'd look too hard for reasons to upset the flow of checks by calling the loan due, but if you brazenly advertise the change of property use to them they may reconsider.

Read your loan papers carefully to see what they can do before you lean on them too much.

As for managing the finances on that property, I'd build up a cushion to deal with the fact that your payment is going to shoot up considerably in year 8. Also consider building up a side business to get another income stream going to compensate as well. You have a little time before it shoots up.

Answer 2

Do you now own your new home, or are you renting? This is a classic case of a mortgage ready to blow up. These 7/1 interest only would have a low rate, say 3%. So on $200K, the payment is $500/mo, but no principal paydown. Even if the rate were still 3% (it won't be) the 23 yr amortization means a payment of $1004 after the 7 years end. At 4%, it's $1109. 5%, $1221.

I would take this all into account as you decide what to do. If you now own a new house, you should consider the morally questionable walk-away. I believe you were sold an unethical product. mb wrote "shoot up considerably." This is still an understatement. A product whose payment is certain to double in a fixed time is 'bad.' 'Bad' in the biblical sense. You have no obligation to keep any deal with the devil, which is exactly what you have.

There are some banks offering FHA products that might help you. I just received an offer from the bank holding a mortgage on my rental property. It's 4.5% for a refinance up to 125% of current value. There's a cost of $1800, but I owe so little, and am paying it off faster than the time left, I'm not bothering. You may benefit from such a program, but I'd still question if you can make a go of a house that even 2% underwater. Do some math, and see if you started now with a 30 year loan how the numbers work out.

(Forgive my soapbox stance on this. There are those who criticize the strategic defaulters. I think you fall into a group of innocent victims who were sold a product that was nothing less than a financial time bomb. I am very curious to know the original "interest only" rate, and the index/margin for the rate upon adjustment. If you include the original balance, I can tell you the exact payments based on the new rates pretty easily.)