First time homeowner considering refi, is it worth it?

Question

In August 2012 I became a first time home buyer in Nevada.  My rate is 3.75% on an FHA loan.  The house was purchased in concert with a non-profit who provided $15K towards principle.  I bought the house for $100K.  The current loan balance is $79,277.  The $15K that the non-profit provided amortizes over 5 years. I don’t make any payments to the non-profit and don’t have to pay them back at all.  I pay $78 per month in MI which will auto drop off in September 2017, so I have $2418 MIP left.  Current value of the house is approx. $145K.

Current payment is $597.49 ( P $136.72, I $247.32, Escrow $213.45)

My FICO is between 729 and 733. I am new at this so looking for some advice re the true cost of two quotes on the table.  Any advice would be appreciated.

One question that I have is the difference between “initial note” rate and “APR” rate.  Does the “APR” refer to the rate including the closing costs?  For the 1st year or for the life of the loan?

Is the “total cost” of the loan the “prepaid items” + “closing costs”?  What about the commitment, application, tax, flood, Interest and Settlement fees?

Bank “A” quote:

• Conv 30 yr fixed, Initial note: 3.625%, LTV 55.47%, APR 3.78%
• Est. closing costs $2,613.50, Est. prepaid items $1,378.25
• Refi $79,277 + $2,613.50 + $1,378.25 (- $68 dis.) =  $83,200 Total Cost/ Loan amount
• Payment: $515.26 (P&I $379.43, Haz Ins $57, RE tax $78.83)

Bank “B” quote:

• Conv 30 yr fixed, Initial note: 3.875%,  APR 3.986%
• Est. closing cost $1,955.00, Est. prepaid items $926.26
• Refi $79,277 + $1,955 + $926.26 = $82,158.26 Total Cost
• Loan Amount $83,000 ( -$841.74 cash back / refund to me of closing costs)
• $83,000 - $1,303.04 (Fees: commit, app, tax, flood, Int, settlement) =  $81,696.96 Amount Financed

Ashley Pimsner · Answer

Hi Jerry,

Here is a different way to look at your question using your original loan amount and ex A.

Currently you owe $79,277 and your payment is $597.49 but in 31 months (sept 2017) your new payment will be $519.49 when your mi drops off. Btw can you have your house reappraised and simply get mi dropped?

The new loan amount in ex A will be $ 83,200 which is $3,923 higher with a new payment of $515.26 which saves you $82.23 a month however mi is only $78 and possibly deductible.

To recapture your cost of higher loan amount of $3923/82.23 it would take 47.7 months or almost 4 years to recapture your costs of new loan.

Currently you only have 27 years left on loan and if you refi you hit the reset button and go backwards to a brand new 30 year loan.

Let's not forget your mi will drop off in only 31 months which 27 months earlier than your ability to recapture costs of higher new loan amount.

New payment with refi is $515.26 and new payment after mi drops off is $519.49 a difference of only $4.23.

Does it really make sense to extend your loan term with refi and add $3923 to your loan balance for a measly $4.23?

Check with your accountant to see if you meet the income requirements for deducting your mi which seems to be the main reason you are considering a refi, I would bet since you were a first time home buyer you do, so again if you can deduct mi why even bother considering a refi?

My humble conclusion is that you are better off NOT doing a refi because mi drops off before you recapture refi costs, you don't extend the term of the loan, and most likely can deduct mi.

Hope that is helpful.

Fred Heller · Answer

Is this an ARM? I've never heard the expression "initial note rate." But I am familiar with "initial rate period," which is the period at the beginning of the mortgage when the rate is fixed.

To answer your question, APR (annual percentage rate) is what you pay on an annual basis to borrow money. APR includes the original amount financed, plus any other fees that have been rolled into the mortgage like lender fees.

So let's say you take out a $100,000 mortgage at 5%. To simplify things let's say interest is charged at the end of the year and you only make one payment, also at the end of the year. Since the interest rate is 5%, you would expect to pay $5000 in interest.

Now let's say that $3000 in fees were rolled into the mortgage. Now you're paying 5% on $103,000. So instead of $5000, you're actually paying $5150.

To get the APR, you divide the $5150 by $100,000, which is .0515. So this year's cost to borrow $100,000, expressed as a percentage, is 5.15%.

Taxes and insurance do not affect APR because you are not financing those amounts. A portion of your monthly mortgage payment goes into an escrow account for taxes and insurance, and they are paid at the appropriate time. The only fees that affect APR are those which are directly related to acquiring the loan and have been rolled into the loan.

Anyway, I am far from a mortgage guru. What I've shared is just my opinion based on my rudimentary understanding of how financing works. Hopefully I was able to shed some light on the subject.

Jerry Sanford · Answer

Fred, its not an ARM.  Thanks very much for the explanation of APR.

Ashley, I agree with your conclusion.  Its actually in line with what I was thinking, just wanted another set of informed eyes looking at it since this is the first time I've considered something like this.  Thanks for your breakdown of the quote.