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Refinance to higher rate to get rid of FHA MIP?

We refinanced our FHA mortgage last year and got a 3% interest rate but our MIP increased to $290/month. We now could refinance to a conventional loan to get rid of MIP but the rate would be 4.9%. In the end we'd get rid of the $290/month MIP but add $275/month because of the rate increase. So we'd be making the same monthly payment amount but money would go to interest instead of MIP. If we stay in the FHA our MIP will be done in 7 years. We plan to stay in the house longer than that. The way I figure, we will be taking advantage of the low rate by staying in the FHA and riding out the MIP. If we refinance to 4.9% we'd be locked into more interest payments over the life of the loan and wouldn't bye able to take advantage of the low rate once the MIP is gone. I'm not a financial person, so is my thinking correct?
  • December 31 2013 - US
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Answers (12)

Wayne,

You're welcome and thank you.  Happy New Year!
  • December 31 2013
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Ralph,
Thanks for the update/correction.  I knew tax deduction expired end of 2011 but did realize it was extended in Jan of 2013 retroactive for 2012.  Hopefully consumer's will take advantage of this for 2013 tax return and check into filing admended tax return for 2012 if they or their tax filer didn't take advantage of that benefit. Same income restrictions apply up to $109K combined income and phase out above that amount.  Large monthly MIP/FHA borrowers can benefit particularly if meet income restrictions since MIP amounts were 1.25 -1.35% over past 2 years which could easily represent a $3-5K+ annual deduction for larger loan amounts. Perhaps User699198 can take a little pain away from high MIP at least for part of 2012 and all of 2013.
I know I will be going back through my closed loan files for 2012 and 2013 files to make sure those customers that are eligible did or will take full advantage of this benefit.
  • December 31 2013
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Wayne,

There are limits on the deductibilty of MI and PMI and it was originally put into effect for 2007 and subsequently extended through 2011 and again through 2013 for the tax filing years of 2012 and 2013 with the passage of The American Mortgage Relief Act of 2012.  There are several limitations for married vs single tax payers, etc. and certainly someone should check with thier tax professional or CPA to confirm they're elegibility since the deduction does phase out with higher adjusted gross income levels; please see the following link: https://ttlc.intuit.com/questions/1901171-mortgage-insurance-deduction.  At this time the MI/PMI deduction is set to sunset Dec. 31, 2013.   Also please look at the following link on prospects for continueing the MI/PMI deduction after January 1, 2014: http://www.inman.com/2013/08/20/dont-count-on-private-mortgage-insurance-deduction-in-2014/.

As before I stand by my prior answer not to refinance to avoid FHA PMI.  Unfortunately interest rates have gone up and will continue to do so and 3% fixed rate of interest is an exceptional value.
  • December 31 2013
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Exactly what was the date and the loan to value (LTV) when you refinanced? Something is not adding up with what you say about your 7 years and the dropping off of the PMI. Depending on when you refinanced and the loan to value it could be longer than or shorter than 7 years. Also, the PMI and mortgage interest could be tax deductible depending on your income level. I am by no means a CPA, but I have ready many items in tax code/law that would substantiate a deduction for a "loan which is secured by real property". Talk to your CPA or a tax professional. If you are a W2 employee and have little or no tax write offs, then you may want to consider the refinance as your higher interest will be absorbed through a write off where the PMI may not be. It may not matter how long you keep the mortgage as long as you keep getting the better write off. Long story short, consult your CPA or tax pro.
  • December 31 2013
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I agree with Justin and Clay........BTW Ralph - MIP nor PMI is tax deductible as of 01/01/2011.
  • December 31 2013
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You are absolutely correct, keep your current loan.  Also, PMI is tax deductible just like mortgage interest as of Jan 1, 2010 so you get the same tax benefit for paying PMI as you would for paying mortgage interest.  Since your PMI schedule is set to expire in about 7 years you will certainly benefit from the monthly reduction coming from not paying PMI and having a fantastic interest rate for the remainder of your loan term.  Good luck and Happy New Year!
  • December 31 2013
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You have a rate of 3%, MI that will drop off and your loan is assumable.  When rates go up, the fact that someone can assume your loan and interest rate could well be worth it's weight in gold.


Keep what you have. 
  • December 31 2013
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This is a classic problem borowers run into. You're paying MIP for an FHA loan. That MIP is coming off in 7 years. Why would you go to a conventional loan when it would be 15min savings for 30 years or save 290.00 for the rest of the loan once MIP comes off? It doesn't make sense to go to conventional to save 15.00. You're also lucky enough to have the MIP dropp off your loan, those getting an FHA now must pay MIP for the life of the loan. Also, with the conventional, your payment will go down but will you be paying MI with this new conventional loan? Is the LTV 80% or lower? Many things to think about. The situation your in now is the best it can be.
  • December 31 2013
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This is a very common situation for existing FHA loans created in the last 12-24 months where the property increase in value has opened the door to refinance to remove MI.    As Clay mentioned, a 2% permanent increase in rate is WAY too much to even be considering refinance.    Work on paying your balance down as aggressively as you can to reach 78% as soon as possible to coincide with the 5 year mark.   
  • December 31 2013
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I would tell you to shop around if you're getting close to 5% conventional quotes. I'm assuming you are quoting the APR. What is the actual note rate for the conventional? There are a couple different options I would show you for conventional loans that could lower your payment a good amount for the time being, but if you plan on staying there for a long time, you have an interest rate that may never be available again. If you're comfortable with your current payment, ride it out until the MIP drops off. 
  • December 31 2013
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Thanks! That's what I was planning to do but wanted to make sure I wasn't missing anything.
  • December 31 2013
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Keep what you have. You have 7 more years of scheduled payments to drop the annual MI but you also are within a 4 year window to drop it based on extra principal payments. Calculate what is needed to escalate the 78% benchmark to 4 years by prepaying. If something happens and you need to sell in a few years a buyer would love to assume a 3% 30 year Fixed mortgage.
  • December 31 2013
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