Primary Residence to Investment Property - Changing PMI Terms
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. "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.)"
yeah, i get that it's not optional. just sucks that nothing has changed substantially since i closed on the loan 11 months ago (same PMI, same HO, essentially the same property taxes) and now i have to pay more. seems like the closing docs could have taken into account timing of those payments so that i primed the pump with enough from the beginning. You should very much nail down your planned expenses and profit. However beyond that you may have some better options to avoid taxation assuming all your plans go well. You should take into account the ability to avoid taxes on the sale of a primary residence. You could build the spec house, then move into the spec house. You could then sell the primary (avoiding any profit less than $500k filing jointly, assuming you meet the Home Sale Tax Exclusion requirements).  You can then in another two years or so sell the spec house if you want and again avoid up to $500k in profit. http://www.nolo.com/legal-encyclopedia/the-250000500000-home-sale-tax-exclusion.html Typically, this is not an option, as the monthly payments are fixed. It depends on the willingness of your financing bank for such a change. You probably will have to refinance (with them or another lender); which is not a bad thing, as you even can get a lower interest rate potentially (as of Jan 2017 - this will change). Consider too: It could be a better solution to instead invest the 25000, and use the investment returns to fill up the difference every month. Certainly more effort, but you probably come out ahead financially. The issue here is that the transaction (your funds to her account) looks very similar to the rent payments which you plan to make in the future. Those rental payments (if deemed to be commercial) would normally be subject to tax. Consider the scenario where rather than an up front $5000, and $5000 over 2 years, you paid her $10000, and paid no rent. That might be an attempt to avoid paying tax. A commercial transaction can't be re-labeled as a gift just based on your election - the transaction needs to be considered as a whole. However, an interest free, unsecured loan connected with you paying rent at market rate would be (depending on local laws) simply foolish (to some extent). I don't think you are able to structure the transaction as a joint purchase (since the mortgage will prevent her from allocating a part of the property to you). Its also likely that you can live in her house and contribute an adequate amount to the household costs without creating a taxable income for her. For example in the UK, up to ~£4000 pa rental income generated from the property in which you reside does not need to be declared. You need to identify the scenarios where your particular arrangement could be imagined as resulting in a taxable or potentially taxable event - then make sure you are not avoiding those events just by choosing how you label the events. Should I treat this house as a second home or a rental property on my 2015 taxes? If it was not rented out or available for rent then you could treat it as your second home. But if it was available for rent (i.e.: you started advertising, you hired a property manager, or made any other step towards renting it out), but you just didn't happen to find a tenant yet - then you cannot. So it depends on the facts and circumstances. I've read that if I treat this house as a rental property, then the renovation cost is a capital expenditure that I can claim on my taxes by depreciating it over 28 years. That is correct. 27.5 years, to be exact. I've also read that if I treat this house as a personal second home, then I cannot do that because the renovation costs are considered non-deductible personal expenses. That is not correct. In fact, in both cases the treatment is the same. Renovation costs are added to your basis. In case of rental, you get to depreciate the house. Since renovations are considered part of the house, you get to depreciate them too. In case of a personal use property, you cannot depreciate. But the renovation costs still get added to the basis. These are not expenses. But does mortgage interest get deducted against my total income or only my rental income? If it is a personal use second home - you get to deduct the mortgage interest up to a limit on your Schedule A. Depending on your other deductions, you may or may not have a tax benefit. If it is a rental - the interest is deducted from the rental income only on your Schedule E. However, there's no limit (although some may be deferred if the deduction is more than the income) if you're renting at fair market value. Any guidance would be much appreciated! Here's the guidance: if it is a rental - treat it as a rental. Otherwise - don't. It might some but I'd wager it pushes the short-term rental pricing down (like hotels) while pushing the long-term rental and housing market prices up.    If landlords can make way more in short-term rentals they are going to do that and limit the supply of long-term.  The tourism sector may have increased revenue but by what extent I don't know.  I'd wager that exploding rent and housing prices will negate any benefits for most residents and may end up costing them much more.  This is why I think you should only be able to do it on your primary residence.  Unless you want to be regulated like a hotel because if you have short-term rentals that you don't reside in, that is effectively what you are.  Not being regulated the same as a hotel at that point only gives you an unfair loophole advantage to other short-term rentals. Danger. The affidavit is a legal document. Understand the risk of getting caught. If you are planning on using the condo to generate income the chances that you default on the loan are higher than an owner occupied property. That is why they demand more down payment (20%+) and charge a higher rate.  The document isn't about making sure you spend 183+ nights a year in the property, it is making sure that it isn't a business, and you aren't letting a 3rd party live in the property.  If you within the first year tell the mortgage company to send the bill to a new address, or you change how the property is insured, they will suspect that it is now a rental property.  What can they do? Undo the loan; ask for penalty fee; limit your ability to get a mortgage in the future; or a percentage of the profits How likely is it? The exact penalty will be in the packet of documents you receive. It will depend on which government agency is involved in the loan, and the lenders plan to sell it on the secondary market.  It can also depend on the program involved in the sale of the property. HUD and sister agencies lock out investors  during the initial selling period, They don't want somebody to represent themselves as homeowner, but is actually an investor. Note: some local governments are interested not just in non-investors but in properties being occupied. Therefore they may offer tax discounts to residents living in their homes. Then they will be looking at the number of nights that you occupy the house in a year. If they detect that you aren't really a resident living in the house, that has tax penalties. Suggestion: If you don't want to wait a year buy the condo and let the loan officer know what your plan is. You will have to meet the down payment and interest rate requirements for an investment property. Your question implies that you will have enough money to pay the required 20% down payment. Then when you are ready buy the bigger house and move in. If you try and buy the condo with a non-investment loan you will have to wait a year. If you try and pay cash now, and then get a home equity loan later you will have to admit it is a rental. And still have to meet the investor requirements. I realize this question is a few years old now, but I wanted to address one of the OP's questions that hadn't been answered yet (my answer is framed as though the question were recent): However, on the plus side, the monthly payment would likely be $200 less/mo with this house vs our current rent. On a 30 year mortgage it would be almost $3-400 less. This makes me think that I could use the difference to pay directly toward the principal each month. Is my logic sound? The way amortization works, if the interest rate between 30 and 15 were the same, then making principal-only prepayments on the 30 year to cover the difference in monthly payments would result in the exactly the same schedule as if you did minimum payments on the 15-year - i.e. the numbers would be practically indistinguishable.  Of course, in practice the interest rate is slightly better on the 15-year, which makes the 30-year with prepayments compare slightly less favorably. If you're confident that you'll be able to reliably keep up with the monthly payments, the 15-year would minimize the total amount of interest you pay, and help you get off of PMI slightly faster.  But the 30-year w/ prepayments gives you the option to skip a prepayment or two if you run into any financial difficulty, which is a nice option to have.  But you do have to be disciplined about making the prepayments every month. You're talking about porting your mortgage, which may be possible if your mortgage was portable to start with, or if your bank subsequently allows it. Note that although porting a mortgage involves keeping most of the original terms and conditions, the process is still much like applying for a new mortgage, including any lending requirements. Here's an article on the subject. EDIT: In response to OP's comment below: What will happen to the first property if I don't sell it? Because porting a mortgage is treated as if you were closing one mortgage and opening a new one, this means that you would need to pay off the first mortgage. Typically this would be done by selling the first property at the same time that you buy the second one. However, if you're not doing this, you'll need to raise funds another way, which could include opening a new mortgage on the first property (of course, if you're doing that, then there would have to be a good reason for porting the original mortgage; otherwise you might as well leave it where it is, and open a new mortgage on the second property instead). Does the article apply the to USA too? That article (and indeed this answer) are based on the situation in the UK. However, they appear to exist in the US too, though are rarer than in the UK. Your biggest concern will be what happens during the transition period. In the past when my employer made a switch there has been a lockout period where you couldn't move money between funds. Then over a weekend the money moved from investment company A to investment Company B. All the moves were mapped so that you knew which funds your money would be invested in, then staring Monday morning you could switch them if you didn't like the mapping. No money is lost because the transfer is actually done in $'s. Imagine both investment companies had the same S&P 500 fund, and that the transfer takes a week. If when the first accounts are closed the S&P500 fund has a share value of $100 your 10 hares account has a value of $1000. If the dividend/capital gains are distributed during that week; the price per share when the money arrives in the second investment company will now be $99. So that instead of 10 shares @ $100 you now will buy 10.101 shares @ $99. No money was lost. You want that lookout period to be small, and you want the number of days you are not invested in the market to be zero. The lockout limits your ability to make investment changes, if for instance the central bank raises rates. The number of days out of the market is important if during that period of time there is a big price increase, you wouldn't want to miss it. Of course the market could also go lower during that time. Given that utilizing all the funds available to you drains your retirement and leaves you with very little cushion for unforeseen events (as already noted), it may be best to use a smaller amount for closing and just deal with the PMI for a couple years. PMI is likely less than the taxes/penalties incurred from withdrawing a full 20% + closing costs. Let alone the lost earning on the accounts (above your mortgage interest rate); but personally I think the stability of significant home equity is worth more than anticipated stock gains. I would recommend pulling enough to buy the house comfortably without dipping too deeply in any one area, while still paying down your balance to where you can eliminate PMI quickly (say 2-3 years). Your limits for each account are approximately: Roth IRAs:  Traditional IRAs: Brokerage (non-retirement): Checking: Things to consider:   If you are current on your payments, you can request PMI removal once your loan-to-value drops below 80% - it also terminates automatically when it is scheduled to drop below 78% (not if it actually has). Many loans have a 2 year minimum PMI period though, regardless of your Loan To Value (LTV) changes. LTV changes could be from: If an entity or individual has full rights to the land and land improvements, they can hold, transfer, delegate, or dispose of them on their terms.  The only exception may be eminent domain.  If the sovereignty meets the public necessity or public purpose tests they can assume or change the rights to your property in exchange for compensation. As others have said writing your own mortgage falls under the category of seller financing.  A seller can write a mortgage with the help of a loan servicing company.  Some loan service companies report to credit agencies, to help with buyer refinancing at a later point. Other forms of seller financing: Leasing Land contracts mineral contracts  and more... Additionally, the seller can finance the minority of the property, called a junior mortgage.  For example, the Bank finances 79% of the value, the seller finances 11%, and the buyer's 10% down payment covers the rest.  If the buyer defaults, the superior mortgage (bank's) has collection priority. More commonly, the seller can option for a wrap-around mortgage or an 'all-inclusive mortgage'.  The seller holds or refinances the existing mortgage  and provides a junior mortgage in exchange for a secured promissory note and an all-inclusive trust deed.  If the buyer defaults, the seller has foreclosure rights. It is not uncommon for entities or people to use financing strategies other than the traditional mortgage if they are unable to exclude the gain on sale.  Check out section 1031 exchanges.  In almost all cases I would tell people not to make decisions based on tax consequences alone, if your financial objective/goal for seller financing sounds like a 1031 exchange, take exception and carefully consider the tax consequences. If it is your primary residence and you lived there continuously and for more than 2 years out of the last 5 - then you can exclude the gain under the IRC Sec. 121. In this case, you'll pay no taxes on your gain. If the property has been a rental or you haven't lived there long enough, the rules become more complicated but you may still be able to exclude some portion of the gain, even all of it, depends on the situation. So it doesn't look like 1031 exchange is good for you here, you don't want to carry excluded gain - you want to recognize it and get the tax benefit. However, refinancing after purchase with cash-out money affects the deductability of the loan interest. You can only deduct interest on money used to buy, not cash-out portion. I believe there's a period (60 days IIRC) during which you can do the cash-out refinance and still count it as purchase money, but check with a licensed tax advier (EA/CPA licensed in your State). "You need to get the current tax software, the 2013 filing software is out already, even though it needs to update itself before filing, as the final forms aren't ready yet. Then you will look carefully at Schedule E to understand what gets written off. I see you are looking at the $2200 rent vs your own rent of $2100, but of course, the tax form doesn't care about your rent. You offset the expenses of that house against the income.  The expenses are the usual suspects, mortgage interest, property tax, repairs, etc. But there's one big thing new landlords are prone to forgetting. Depreciation. It's not optional. Say the house cost you $400K. This is your basis. You need to separate the value of land which is not depreciated. For a condo with no land it can be as little as 10%, when we bought our house, for insurance purposes, the land was nearly 40% of the full value. Say you do the research and decide 30% (for land), then 70% = $280K. Depreciation is taken each year over a 27.5 year period, or just over $10,000 per year. (Note, the forms will help you get your year 1 number, as you didn't have a full year.)  This depreciation helps with your cash flow during the year (as you should do the math, and if you keep the house, adjust your W4 withholdings for 2014, that lump sum you'll get in April won't pay the bills each month) but is 'recaptured' on sale.  At some point in the future, you may save enough to buy a house where you wish to live, but need to sell the rental. Consider a 1031 Exchange. It's a way to sell a rental and buy a new one without triggering a taxable event. What I don't know is how long the new house must be a rental before the IRS would then allow you to move in. The same way you turned your home into a rental, a rental can be turned back to a primary residence. I just doubt you can do it right after the purchase. As fellow member @littleadv would advise, ""get professional advice."" And he's right. I've just offered what you might consider. The first year tax return with that Schedule E is the toughest as it's brand new. The next year is simple in comparison.  The question of selling immediately is tough. Only you can decide whether the risk of keeping it is too great. You're saying you don't have the money to cover two month's vacancy. That scares me. I'd focus on beefing up the emergency account. And securing a credit line. You mentioned the tax savings. My opinion is that for any investment,the tax tail should never wag the investing dog. Buy or sell a stock based on the stock, not the potential tax bill for the sale. In your situation, the rent and expenses will cancel each other, and the depreciation is a short term loan, from a tax perspective. If you sold today, what do you net? If you analyzed the numbers now, what is your true income from the property each year? Is that return worth it? A good property will provide cash flow, principal reduction each year, and normal increase in value. This takes a bit of careful looking at the numbers. You might feel you're just breaking even, but if the principal is $12K less after a year, that's something you shouldn't ignore. On the other hand, an exact 'break-even' with little equity at stake offered you a leveraged property where any gains are a magnified percentage of what you have at risk.  Last - welcome to Money.SE - consider adding some more details to your profile." This is one way in which the scheme could work: You put your own property (home, car, piece of land) as a collateral and get a loan from a bank. You can also try to use the purchased property as security, but it may be difficult to get 100% loan-to-value. You use the money to buy a property that you expect will rise in value and/or provide rent income that is larger than the mortgage payment. Doing some renovations can help the value rise. You sell the property, pay back the loan and get the profits. If you are fast, you might be able to do this even before the first mortgage payment is due. So yeah, $0 of your own cash invested. But if the property doesn't rise in value, you may end up losing the collateral.