Help! Is it wise to refinance my FHA to a conventional loan?

Question

Bought the house for 198k over a year ago with an FHA loan and I have a $1059 mortgage.  It is now worth about 245k and I have lived in the house for over a year and want to buy another property.   I was wondering if it would be a smart move to refinance the house since I now have about 20% equity in the house to get rid of the PMI (which is about 130$ a month) so I can generate more monthly cash flow. I've read it would cost about 4-6k for closing cost on refinancing to a conventional loan.  Would it be wise to just keep the FHA and seek out regular conventional loans for future purchases, or would it be better to go ahead and refinance into a conventional loan?  Also, other than the 130$ that I will be saving from not paying a PMI, would the mortgage be lower as well? (not including the PMI since that will obviously already lower the payment)  Thanks in advance friends!

Brian Hamel · Answer

@Lily Sellers I would just be aware you will have to live there for 12 months before you can get another owner occupant mortgage.

Lily Sellers · Answer

Than you Dave, I appreciate you immensely

Patrick Liska · Answer

Lily,

you need to find out what interest rate and terms you can get to calculate if there is any savings. if it costs you the worst case scenario of $6,000 for the closing then that would be the equivalent of about 46 months of PMI insurance. If you can get your mortgage for equal to or less than what you are paying now, it may be worth it. I would also check to make sure that you loan agreement does not have a clause in it that if you pay off the loan early that you may owe the bank a certain percentage of interest.

Matthew Irish-Jones · Answer

@Lily Sellers yes it can be wise if you get a decent interest rate and repurpose the funds properly.  You still need to be cash flow positive on your current investment so make sure you understand the new mortgage rate.

You will need to make your next purchase with a conventional loan most likely so refinancing equity is a great way to buy more properties.

I started with an FHA loan 12 years ago and worked an hourly job.  I have leveraged that into 45 doors by constantly refinancing and buying more units.

Be careful of over leveraging and taking on too much risk, otherwise it’s the best wealth building strategy there is in my opinion… well besides starting a tech company.

Jennifer Jo McCallon · Answer

I would start making calls and ask a few lenders. Smartest move I ever made was switching to a 15 year mortgage. That allowed us to pay down the house substantially over 8 years- at only about $100 more/mo. This one smart move gave us way more equity after owning for 8 years, which then allowed us to buy a fixer vacation property, which I was then able to leverage into more residential income properties. Ask your realtor for a referral for a great lender. Or see if you can find one with no or low closing costs. My bank (a major national bank) runs specials from time to time with "no closing costs" (or so they claim : ))

Dave Skow · Answer

Lily - refinancing the  FHA loan to a conv  loan  makes sense  for lots  of reasons   ( mostly getting rid of the permanent mtg ins)  ... the  thing you need to analyze  is   comparing your present FHA  rate to the present  conv rates  ..rates  have increased a lot  so  this might take  away  the  large  benefits  - hope this helps

Greg Dorn · Answer

Oh man I love it, permanent mortgage insurance (not private mortgage insurance, which would be for a conventional loan, MIP or mortgage insurance premium is FHA). Anyways, I think it would likely be worth it but you would need to refinance while still living in the home. You would need to make sure to leave 20% equity in the home (sounded like you were going a rate an term so you would be fine). You need to know what your fees are! Even though you have paid on the house the mortgage balance goes down very slowly in the beginning and fees for refinancing are always a few thousand so your principal paydown may be eaten up with the loan costs. You can get some incidental cash out (1%) and a refund of your escrow account. BIGGEST THING... do not sign an occupancy certification again. You could get stuck in the house for a year minimum if you go to a big box lender and they stick in an occupancy certification. With just the FNMA loan paperwork you usually wont have one on a refinance but some lenders add them in so read everything you are signing. ALSO, careful about doing the 15 year loans. If you make a lot of money then you can do it but if you dont and you are doing more loans in your name then doing a 15 year loan will increase the minimum payment and 'potentially' reduce your future ability to qualify for more loans in your name. If you take a 30 year mortgage and pay it like a 15 year then you will pay it off in 20 (approximately). Nice part is that your credit report will still list the minimum payment as what was on your original loan or less if the lender automatically recasts the loan to keep the term the same 30 years. Again be careful. Talk to someone who is good with numbers and can show you the benefits and downsides of the change with an amortization schedule for both your current and possible future loans (I have a dedicated spreadsheet to do this for clients). Not difficult and you can use bankrate amortization sheets to figure it out yourself as well if you are good with excel.

Patrick Liska · Answer

Lily,

To answer your question, you will not be breaking any Clause by refinancing because you would be changing lenders and the original lender will be paid. Some loans come with an agreement in the terms of the loan that if they are paid off early that a certain percentage rate of the balance paid off is due to them. You may not have that in your FHA loan, but reading your loan agreement or talking to your current lender will tell you if that is in the agreement. As mentioned by others, if you can find a loan interest rate that is better and you eliminate the PMI insurance, a good thing to see if you can do is shorten the length of the loan if you end up paying the same amount you are paying now, you win with a shorter pay off time, less interest paid and equity gets built faster.

Lily Sellers · Answer

Thank you Jennifer!  That's actually HUGE information.  Build just as much equity in half the time.  Might be something worth looking into.  Thanks a bunch friend.

Lily Sellers · Answer

Thank you both for responding.    Would refinancing break a clause that you are talking about Patrick? Cause that would change the game plan drastically if I had to pay a certain amount of interest to the bank.

And Matthew, If I refinanced my current FHA loan into a conventional loan with the equity I've built into the house would it be unwise to use an FHA loan on another property?  Or would you consider keeping the current FHA loan and using a conventional loan for the next property with the equity from the FHA loan property?

Help! Is it wise to refinance my FHA to a conventional loan?

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