I obtained an FHA loan for 240k at 5% with PMI back in April 2009. In 2013 I received an offer in the mail to refinance my loan to a streamline FHA loan to 3.5% interest rate, the mortgage company didn’t lock me in time and I wound up with a 4% FHA streamline loan. I read that PMI drops off automatically when you reach 78% of the debt to equity ratio but was recently told that this would not be the case and I would be paying PMI for the life of the loan since I refinanced into new FHA guidelines in 2013.
I recently received an offer in the mail to refinance out of my 225k FHA loan into a conventional loan at 4.375% interest. I would not have to pay $103/ month for PMI but would have a higher interest rate. I want to make the best decision possible and would like to know if anyone thinks his is a good deal?
that's crap they did that to you. they probably aslo double the PMI on you (that's what happened to me when i did a HARP streamline for an investment property).
To hit a home run refinance, you need 1. lower interest rate 2. knock some years off the loan 3. minimal amount of closing costs..
Why not refi to a 20 year? That's what I did on my (former) primary residence). Or even a 25 year if you can find a bank/broker that will do that.
Run the numbers to compare monthly savings, if any between slightly higher rate but no pmi. Don't forget to include upfront cash closing costs to refi. Even if they roll that into the loan and you don't have to cough up the cash, it's still costing you money day one so you need to factor in that cost. After doing that little exercise, honestly assess how long you plan on keeping that property. 5 years? 20? let the numbers decide for you.
@Robert M. People consider refinancing debt for a variety of reasons, but potential saving through reduced monthly payments is certainly one of the more common reasons. Due to our low interest rates for the last several years, this has been a driver of the mortgage market as sales have continued to lag historic levels. How does one determine if refinancing for a different rate is for them? I will walk through the scenario presented above to show how I would analyze this.
In this scenario, we have a borrower that is considering paying a higher interest rate to get rid of PMI expense. Based on the numbers given, here is a breakdown of what loan payments would be like for each of the three scenarios. I only include known numbers...in this case principal, interest rate and PMI as stated by Robert. Insurance and taxes are specific to each situation and will be the same regardless of interest rate etc so I leave those out of my calculations...even though they obviously will have to be paid directly by you or added into your payment. The one number I do not know for sure is the Prin amount for the Streamline refi in April 2013. In this case, I am sticking with the same principal amount as in 2009. I know you can't take cash out with a stream line refi, but I do not know for sure if they base payments on the original principal amount (resulting in less than 30 year mortgage) or the principal due at time of refi. If they take the current principal as opposed to the original $240,000, the amount of "savings" (reduction in monthly prin & int payments) will be smaller. You can use a simple online mortgage calculator to plug in your own numbers as needed.
|Loan Amount||$ 240,000.00||$ 240,000.00||$ 225,000.00|
|Prin + Int||$ 1,288.00||$ 1,146.00||$ 1,123.00|
|PMI||$ 103.00||$ 103.00||$ -|
|Total||$ 1,391.00||$ 1,249.00||$ 1,123.00|
|Yearly Total||$ 16,692.00||$ 14,988.00||$ 13,476.00|
|Total Payments||$ 500,760.00||$ 449,640.00||$ 404,280.00|
In looking at the numbers, it does appear that paying a slightly higher interest rate has the potential to save money to the tune of $1512/year. The majority of the savings is in getting rid of the PMI with the current loan as that represents $1236 of the $1512 in savings. The rest of the "savings" is in the $23/month reduction in monthly Prin+Interest payment.
Wait a minute....the interest rate went up to 4.375% from 4% but the payment went down? Yes. This is where you have to think big picture. Notice that the amount borrowed changed from $240,000 at 4% to $225,000 at 4.375%. The savings is due to the fact that less principle is borrowed. Additionally, this is restarting a 30 year mortgage....although since the second mortgage was from less than a year earlier, this is not a huge deal. If you were considering getting out of the first loan from 2009, you would need to factor in that the first mortgage would be paid off 5 years earlier than the new mortgage. Making 5 more years of payments can certainly eat into potential savings in addition to extending how long you will be in debt. In this case, the first loan was replaced already so again, less than a year difference is not a significant matter.
The other thing to consider is the cost to refinance. For a loan like this, in my area, I am easily looking $1800 in closing costs plus another $1000 minimum in origination fees etc...assuming I did not buy down the rate. So I would look at how long it will take for any potential savings achieved by the refinance to pay back the cost of the refi. Sometimes you pay out of pocket and sometimes these fees are just added into the loan or even deducted from the amount due back to you if it is a cash out refinance. Either way, it is an expense you need to account for. In this case, if it cost you $3000 to refinance, then it would take 2 years for the reduction in payments to "repay" you for the expense to refinance. Again, this is a unique scenario due to the reduce principal amount borrowed being the main driver of savings rather than a reduction in interest rate, but less per month is less per month, even if it does reset the 30 year clock by almost 1 year.
In summary....in this particular case....would I take the deal and refi and get out of PMI? Absolutely - with the following conditions. 1) I plan to hold onto the property for at least 8 more years....plans change but refinancing is a long term savings strategy 2) I could refinance for no more than $4500. The more it costs, the longer the payback at $1512/year in savings which means the longer i had to hold onto the property. If I KNEW that under no uncertain terms I would keep the property for at least 20 years...then this is a no brainer.
Rather than do complicated math to determine rate of return etc....I make the simple decision like this. If I can recoup my refi costs within 4 years or less and I plan on keeping the property for at least the amount of time to recoup the costs, then I refi. If I sell or pay off mortgage in 4 years....i broke even. After that is a profit. How much profit compared to investing elsewhere? That's another topic entirely and dictated by whether or not I paid to refi out of pocket vs adding it into the loan.
Hope this helps.
ok....the numbers looked much better before it got posted. here is a screen shot that should not get altered when I post.
Thank you for the breakdown @Chris Simmons !
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