Best way to refinance out of a 5/1 FHA Loan

11 Replies

Good morning! I'm looking for some suggestions regarding how to refinance out of my current 5/1 FHA loan that we took out when we bought a two-family investment property. We did the FHA so we could keep the cash for the reno, but now that the reno is completed we should have over 20% equity. I want to get rid of the PMI as well as locking in the lower rates of the current market before rates start climbing too much. The problem is, our reno went way over budget and now we have a pretty high Debt/Income ratio. We do live there, so it's an owner occupied 2-family and we are located in North Jersey. We also need to refinance with little to no upfront costs. Any suggestions would be really helpful. Thanks!

If you have equity you can always roll the refi costs into the mortgage. The sucky part that is that you will need always some money to fund the escrow account, and NJ property tax being so high, it can be a good chunck of money.

How good is your rate? Why dont you get a heloc and pay off your other outstanding debt? That way, when you refi, you can also refi the heloc into the mortgage. And it will reduce your debt to income ratio.

I am thinking that a 5/1 must hae a great rate, I would try to milk that first 5 years as much as possible. 

But if you intend to move, I would plan on refinance with a long term mortgage with homeowner prices.

Best of luck.

Put some more info! Values, outstanding amount, how many months left, interest rate, PMI...

@rafael - Thanks for your feedback! I was thinking about a HELOC, but wasn't sure if I should save that for when we want to buy another property in a couple years? Maybe that's the best idea though.

We do have a pretty good rate 3.75%, but I'm worried that by the time it expires (in about 4 years at this point) that rates will be significantly higher. Also, we're paying over $300/m in PMI that just seems like a waste? I keep getting offers in the mail about how the PMI rate was reduced to .85% in 1/ you know anything about that?

We haven't quite decided when we will move again, probably within 5 years though.  

I didn't think about the property tax escrow...can't I just use the money that's already in escrow with the current loan?

3.75 is not that good of a rate today for a 5/1. Owner occupied with 20% down today, for a 30y mortgage you can get that rate probably. I am refinancing with a 15y, and got 2.75. The 5/1 ARM was not too far from that. But every situation is different.

PMI did get reduced, but I dont think it is retroactive. But paying no PMI is better than any PMI. =) I dont pay PMI so I dont know the rules for it.

On the escrow, you will get your money back, but you wont be able to use it to fund your new escrow account when refinancing. It is annoying (I am refinancing now, and my closing costs were really high because of that). You might be able to roll it into your new mortgage, but I chose not to.

On to canceling your PMI, for 15 year mortgages you don't have to wait 60 months to cancel your PMI. I am unclear on the 5/1. For 30 years is 60 months (5 years). I would look if you can get rid of your PMI just by appraising your property to prove you are at 78% LTV.

I tried to find more info, but I couldnt.

@rafael - Thanks again for your helpful feedback!  

I talked to our lender and they indicated that since it was a FHA loan, we are stuck with the PMI for the life of the loan....this is why we were looking at refinancing. We only had 3.5% down when we bought a little less than a year ago. Also, with the reno, our credit took a hit (we put a lot of the costs on credit cards that we are paying down now) so we qualified for something around the range of 4.5-4.75% with a 30 year. But that was just in talking with one lender. Do you have a lender or a broker you recommend?

Rafael has some good advice about using a HELOC to get your DTI down. The only risk is that you may push yourself beyond the 80% LTV if you try to consolidate that back into the mortgage. If that happens, a great option is to look into a single upfront PMI payment. I paid about $4k total for this option instead of paying $200 monthly. The payback time of 1 year and 8 months is far better than $200/month for 12 years or so.

@Eddy Dumire thanks for the feedback, thats a good point.  We have a pretty good cash flow, so the hope would be to pay off the heloc in a reasonable amount of time, then we would be back to the 20%...we're hoping that we actually have closer 25-30% equity, but we won't know for sure until we get the appraisal.

HELOC is interest only, so it will reduce our DTI by a lot. You need to calculate the LTV with the HELOC, if you go over, you wont be able to refinance, because of the position of the liens. By doing a heloc, it will help improve your credit right away because you will get out of credit card debt. The heloc can go upt to 90% LTV (usbank), but the better rates are for up to 80% LTV (td bank has good rates).

As for PMI, it is not for the life of the loan. That is incorrect. It is only until your loan hits 8% LTV, or 60 months which ever takes the longest.

I use Elend for conventional mortgages, they have very low closing costs, and good rates. I often wonder where those guys make money. My broker name is Nimro, his phone is 973-585-5923. Tell him I sent you.

@rafael - Thanks so much!  I will definitely reach out to him when we are ready to refinance!  We actually have a personal/construction loan with TD right now, but they were very conservative lenders, but I'll look at them.  

With the PMI - are you sure that applies to FHA loans?

Well, that sucks! It looks like you are correct. I had to go google it. After 2013, FHA PMI is for the life of the loan.

Refinance that! 

Just to be extra clear, any loans after 2013 will have a life of the loan PMI (or MIP), because FHA will insure that loan for the life of the loan. Prior to that it was the 5 years and 78% LTV.

That makes the FHA way less interesting to a buyer in my opinion.

Yes, I agree. We did it knowing that we were going to refinance as soon as we could. I do think you can reclaim some of the upfront PMI you have to put up though if you don't have the loan for 60 months.