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Does it make sense to refin an FHA into a Conv w/ higher rate to get rid of PMI and lower payments?

This is the scenario. I purchased on April 2013 with FHA loan with a 3.5 rate on a 30 yr fixed. Monthly payments are high for me right now at $2,700, being 1870 for principal and interest. 42O PMI and 350 county tax. My current balance is 408K. I have confirmed with my real state agent house has gained 10% equity according to the median sales price in the area. A lender is offering me to do a 90 LTV conventional loan at 4.75 int rate, no pmi, lot closing cost rolle dinto the loan, loan amount 410K. Monthly payments of 2,170 w not impound account. Please help me find out if this is worth to do or not. I understand I would eliminate the PMI and save me $420 there per month plus 1,500 tax credit at the end of the year but if I'm not wrong 300 more on interest per month would be 108K more on interest at the end of the loan. Another thing I'm not clear because every article says something diff is if I will carry PMI for only 5 years or 10 to 11 years if you have to reach 80% LTV  based on the appraised value at loan origination and not new appraised value?
  • April 15 2014 - Los Angeles
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Answers (12)

I agree with Tracy. Your loan officer should be able to provide you with a full analysis that will help you in deciding whether or not you should refinance. One other option to consider is to refinance the first at 80% and a second mortgage for the remaining 10%. I'm sure any one of us here can prepare such an analysis for you.

Best regards,
Elva
  • April 16 2014
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There could be alternative options for you. If I were in your position, I would contact one additional Mortgage Professional to give you a full mathematical analysis in writing so that you can really see all of your options and what makes sense for you both in the short & long term. There is PMI built in to the interest rate you were quoted if you are in fact being quoted at 90% of the estimated/appraised value. There could be other options for you where you can qualify for lower interest rates and avoid PMI - one of them being looking at an 80% 1st mortgage and a 10% 2nd. If the Loan Officer you are working with now isn't providing you with a full analysis that you can review and determine the true benefit and navigating you through it, you need to contact someone that will. You should not have to come on Zillow and ask other Mortgage Professionals if there is benefit - the one you are working with should be letting you know and if they aren't, they are not a Professional. All the best!
  • April 16 2014
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Profile picture for lb8182007
Thank you all for your answers so far so we are in the same page that having paid 3.5% down and sending the minimum monthly payments of 2700 I will have to carry PMI for 10 more yeas approx. Considering this is it a good move to refinance into this conventional loan? Am I right when doing this math calculation? $300 more on the principal and interest a month in 30 years will be 108K more on my loan. Minus $420/month PMI for 10 years is 50K that I would eliminate, minus $1500/year tax credit for additional interest on 30 years that I would gain will be 45K. So the cost of my new loan would be 108K-50K-45K= 13K? based on this it would be worth to refinance for lower payments. Am I missing something?
  • April 15 2014
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You have now 1870 Principal/Interest + 420 PMI for total of 2290.

You say 4.75 rate at 410000 for 2170, but that would come out to 2138, 4.875 Rate would be 2170 payment.   

Your MMI will decrease once annually as your loan amortizes and eventually drop off. If you refinance you add one more year to the loan term to save $120 now and permanently increase your rate by 1.375% in exchange for removing a temporary insurance.   

You also say Lot closing costs rolled into loan, but then your new loan balance is only 2,000 above your current balance, and your current payoff alone would be ~410,000 so are being charged closing costs for the 4.875 rate?

I personally don't see much benefit for you unless your objectives are strictly short sighted.  

  • April 15 2014
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Profile picture for Brookstone Mortgage
I disagree with most of the answers here. I would not take a 4.75% rate with "no PMI" because it's not true. The PMI is in that rate and you will still be paying PMI for the life of the loan, just in a different way. You should consider pricing a conventional loan at 90% LTV with borrower paid monthly MI. You will get a better rate and you only have 10% to go before you can get the PMI removed. The PMI will also be much lower than the FHA you are paying now. I suspect this would be your best bet for long term savings. Have someone compare all scenarios for you side-by-side. Let me know if I can help.
  • April 15 2014
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Profile picture for Roseville Loan Guy
Assuming your loan is eligible under the old system, Adam (and anyone saying 80%) is about right. Its 5 years (60 payments made) AND 78% of the original purchase prince/appraised value (whichever was less), not 80%. 

New appraisals are not allowed when you want to remove FHA MI. 5 years and 78% of the original price/value. Its that simple...

It takes about 11 years to get to this point if you put the minimum 3.5% down and are making the regular monthly payments, so you're looking at another 10 years (est) in your current loan with FHA MI in that scenario. In my opinion that makes no sense. If you can start saving $250+ a month right now that is $30,000 before the FHA MI can be removed (assuming no accelerated payment schedule). Even with lower payments after that you're looking at close to 20 years before you start saving any real money keeping the FHA loan you have now.

To make sure your loan is eligible to remove MI at all you need to make sure your loan was ENDORSED BY HUD before Jun 3rd of 2013. I see you say you closed in April of 2013, so odds are it was, but that is a close enough timeline that you'll want to make sure before making any decision (especially the decision to keep your current loan). I have seen loans that were delayed in being endorsed by a month or so (average is 10-14 days after closing). While not likely if you closed in April there is a definite possibility it was not endorsed before June 3rd of 2013 and in that case you will never be able to remove the FHA MI. 
  • April 15 2014
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Profile picture for lb8182007
@ Adam- Thank you for your comment. That's where I"m confused about removing the MI. From what I understand you can remove it after 5 years only if you have 20% equity based on scheduled amortization meaning you sent additional payments that get you there. However new appraised value is not taken in consideration. Only the appraised value at loan origination. Please someone correct me if I'm wrong.
  • April 15 2014
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  • April 15 2014
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Because you purchased before June of 2013 you are correct about your mortgage insurance going away at 80% LTV. At a 3.5% interest rate over the 30 years of the mortgage you're going to save money by paying the MI until it drops off. If you are in a situation where you are not able to make your current mortgage payment of 2700 then that is a definate option I would take.

At a rate of 4.75% though I would say to shop around your loan to see if you can find a better interest rate because I feel that is slightly high. I'm curious if there reason it is so high because he's getting you into an LPMI (lender paid mortgage insurance) loan.

If I were in your position I would advise you to ride out the MI until it goes away, in the long run it is the best deal for you. That's even if I stood to make the commision off of the deal.

Feel free to reach out if you'd like more information,

Andrew

  • April 15 2014
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If you remain in your current FHA loan, then your monthly MI will be removed either 5 years or when your mortgage balance reaches 78% of the original sales price or appraisal value (whichever is less), whichever is longer. Even with 90% equity, there will be mortgage insurance paid. It will either be paid by lender or borrower by an upfront payment. The cost of this is most likely built into your higher interest rate to cover this cost. Once thing to keep in mind is to ask yourself how long will you actually keep this mortgage. Statistically speaking, most First Time Home Buyers hold their mortgage for 3-5 years; whereas, in general, the life of a loan is 5-7 years. This is for various reasons, but First Time Home Buyers typically buy a bigger home after a few years. Others will want lower mortgage payments; take money out of their equity; and pay off their mortgage sooner by refinancing to a 15 year loan (or another lower amortized loan). Hopefully this info will help you with your decision. There are alternatives too. If you wish to learn more, then please feel free to contact me through my profile.
  • April 15 2014
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Definitely!  MI does not reduce your interest or your principal.  You'll be out of your FHA PMI after 5 years if you are paying extra to be at 80% by the end of that 5 years.  If you don't pay extra to get to 80% after 5 years, it typically takes 10.5 years to reach 80% with normal payments.  After 5 years however, you can order and appraisal and if it reveals you have 20% equity, you should be good to drop PMI then. 
  • April 15 2014
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Profile picture for Roseville Loan Guy
A.) yes, in my professional opinion that deal is definitely worth it.

B.) I might look at doing it another way. Doing the loan WITH MI but a lower rate, because if you do an LPMI (Lender Paid Mortgage Insurance) loan, with a higher rate to cover the MI, the higher rate/payment stays that way for the life of the loan. 

If you had a loan with annual MI payments they will be gone eventually (assuming you don't pay off the loan first). This can be as short as two years in some cases (using the new appraised value in an appreciating market) or may be longer. 

There are some calculations I would want to do before going forward with a "no MI" loan. If you plan on owning this home for the long term a loan with regular MI payments just might be the best long term strategy. 

Sincerely,
Greg
  • April 15 2014
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