Should I refinance out of FHA to get rid of PMI?

Question

So I am at a crossroads right now and would like some feedback. Currently, my FHA rate is 3.375% with a MI (mortgage insurance) of $305/monthly. I owe $264k and I purchased the property for $296k in 2013. My loan officer is recommending I refinance now to a conventional loan at 3.75% and remove my MI since it would appraise at $365K. My FHA loan was originated pre June 2013 so the MI is not permanent.

Should I keep my low interest rate and keep sending extra payments to the principle to eliminate the mortgage insurance after 5 years or follow my loan officers advise?

Should I keep my low interest rate and keep sending extra payments to the principle to eliminate the mortgage insurance after 5 years or follow my loan officers advise?

Mike Hanneman · Answer

You have to run the numbers and see what makes sense. Lets say you get to your 78% in 3 years. Thats $12,600 that went to nowhere that would benefit you. Mortgage insurance goes to the banks bottom line, they love mortgage insurance payers!!

At your new rate your loan would be roughly $55 more, That's 229 payments or 19 years to equal the $12600. Are you going to be living there in 19 years to offset that difference? Mean while you refi and you will see a $250 a month ( $350 - $55 ) increase in your bank account every month thaqt you can spend however you choose, Even use this to paydown your loan faster if you wish. The loan costs I would roll into my loan so no out of pocket to you.

Also if you are wanting to buy another property, refi with cash out closing now, and you can get money for another property.

The main thing that you need to see is that $350 is going to make a banker rich not you!! Get rid of PMI as soon as possible.

Ben Franco, Jr. · Answer

Awesome breakdown Bill Schrimpf

Bill Schrimpf · Answer

@Ben Franco, Jr. Remember a mortgage officer is a sales person!  They get paid when you purchase a product, err, refi.  That doesn't mean the advice is bad, rather, its important to understand where the advice is coming from.  How long do you plan to keep the property and what are you goals?  Do you really plan on keeping it 30 years?

Your current payment is probably about $1160 + 350 PMI = $1510

New payment on current amount owed but higher rate is about $1220.

$1510 - 1220 = $290 monthly savings to eliminate PMI

$290 * 24 = 6960 savings (if it takes you 2 years to eliminate PMI on current loan)

$290 * 48 = $13920 savings (if it takes you 4 years to eliminate PMI on current loan)

---The PMI savings goes up if your making additional principal payments every month! ---

1220 - 1160 = $60/mo in additional interest (which is tax deductible)

$60 * 360 months (remaining life of loan) = $21600 in additional interest payments over 30 years

Russell M. · Answer

Take it to the logical conclusion.  If the refi loan will be $55/mo more, as @Mike Hanneman said, and you are saving $250/mo, do the math.  If your timeline to hit 78% LTV is 2 years if you don't refi, you save $6000 at $250/mo X 24 if you do.  If it takes 4 years, you save $12000 at $250/mo X 48 if you do

If your loan closing costs will be less than $6,000, you should probably go for it.  That would give you a 2 year payback with then 28 years of savings.

I know you are in CA, but I would be leery about banking on appreciation to get you to your LTV.  Besides, what if it took longer?  I would base the decision on the time to pay back the closing costs and fees and not worry as much about appreciation.

Kristy Farmer · Answer

You can certainly refi more than one time if the numbers turn out to benefit.  I just refinanced my home for the cash out option to get capital for investing in Real Estate property.  I got rid of the PMI and escrow.  Now I can keep that money all year and pay the policies and taxes.  It was best for me and I had 4 years and $40 k in equity.  I think it worked out for me.  The numbers seemed to work out but it was scary as my mortgage payment went up slightly.  It was still $50 less than the PMI was costing.   You don't get the PMI back.  It's just additional interest.  I plan to not keep a mortgage on this house in a few years.  It's a goal to invest in vacation rentals and hit my mortgage hard to pay it off quicker.  I opted for the 30 year note because of my intentions.

Bill Schrimpf · Answer

Thanks for the kind words Ben.  I'm just starting out so cashflow is king.  I would refi and take the immediate cashflow.  If I had a more stable business with 10 or 20 units, I would probably take the longer view and keep the lower rate.

Ben Franco, Jr. · Answer

I see appreciation as icing on the cake, however, I don't really count on it. I've been sending $280 monthly to the principal from the cashflow of another rental to reach 78% LTV. @Russell M. thanks for your advise!

Ben Franco, Jr. · Answer

Awesome feedback 🙏🏻 thanks!!! This property will eventually be a long term rental and would cash flow more without that pmi. The plan is to re-invest the cash flow to pay down the loan.

Ben Franco, Jr. · Answer

Thanks for the quick reply. Even though the pmi will be removed when I hit 78% LTV in 2-4 years @ 3.3%. you think my savings are going to be greater with the 3.75% in addition to the loan costs on the life of the loan?

Mike Hanneman · Answer

You are looking at your refi loan being somewhere around $55 more a month. Getting rid of your $305 monthly payment that is going nowhere. You save around $250 a month!! Then you can take the money out of your equity and use it to go buy another property. If I was in your shoes I would refi!

3.75% is still a really good rate.

Should I refinance out of FHA to get rid of PMI?

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