Should I refinance for a lower monthly payment?

Question

Here is my current situation:

30-yr fixed at 4.25%, current loan amount $166200, monthly payment $1115 (PMI included), condo purchased 9/15

Refinance terms:

30-yr fixed at 4.25%, loan amount $172793, monthly payment $1007

Is it worth it to refinance? The entire reason I though about refinancing was to remove the PMI because I had put in sufficient upgrades that I believed it would bring my loan to value ratio to 80%. The refinance is a lender paid PMI and my appraisal did not quite make it to 80% loan to value. Basically, the savings on the monthly payment accounts for the PMI ($100). The down side is I now have $6500 more debt and originally I was going to sell the place after a couple years to invest in a more expensive property. But if I plan to hold it longer (5+ years) then it is probably worth the refinance, otherwise no, right?

Jassem A. · Answer

I probably wouldn't bother. After you pay it down to 80% then you should be able to get them to remove the PMI anyway

Chris Mason · Answer

I get made fun of by my peers because I'm like 95% purchase business and 5% refi... most lenders like to be 50/50 or 60/40, so I'm an oddball. It's because I don't believe in many/most refinances, and I don't sell what I don't believe in. So that's my bias.

This is one of those that I do not think makes sense. "Lender paid" PMI, but $6500 being added to your loan balance, $6500 less you get back when you sell? I question just how "lender paid" that is - old trick. I say pass. That appraisal fee was a gamble, and it doesn't always pan out. Being out $500 or whatever doesn't automagically make it a good idea to tack another $6500 on top of that.

And "not quite" being at 80% LTV, but tacking all of this onto your loan balance? Everyone focuses on the appraisal, but loan balance is the numerator in loan-to-value. We can't keep jacking loan balances up and then act surprised when LTV doesn't work out!

Cash flow is king on long term investment properties, I agree with the consensus here. Primary residence that you're going to sell one day, I'm generally an advocate of being less in debt so you can have the biggest payday possible when you go to sell. IRS looks at your old purchase price, not the loan balance, when they calculate capital gains if applicable -- if you keep maxing out your loan balance, it's actually possible to LOSE money from selling a house after the IRS takes their chunk. In these situations, you aren't selling while underwater on the mortgage, but you're clearly underwater on mortgage+taxes (everyone knows the cap gains tax rules for selling RE, so I'll skip that).

Darren Eady · Answer

Yes, "wouldn't be worth the savings"

Thanks!

Joseph Zanazan · Answer

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Dagart Allison · Answer

@Shmuel Harris Yes, the lender will drop the PMI once I get to 80% value, but I do not want to put that much cash in. And no on the refinance PMI, this is a lender paid PMI, it results in lower monthly payments, but will be there for the life of the loan unless I refinance again. Thus not very advantageous for someone looking to keep their loan for a long time, but if you plan on keeping the loan for a short period it can be a benefit.

Dagart Allison · Answer

@Darren Eady did you mean to say it wouldn't be worth the savings?

Darren Eady · Answer

With that much in additional debt for a two year period, it would be worth the "savings".  You already answered your own question.  It takes about five years to recoup the costs in a typical refinance.  If they could do a no cost refinance, then it is always worth dropping the rate if your balance stays the same or you can drop PMI.

Should I refinance for a lower monthly payment?

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