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Should I refinance from FHA to Conventional?

So here is my situation. I bought a house in NJ .. I'm the co-borrower because my income wasn't eligible..and my aunt is the primary. Because i want to become the primary ..i have to refinance.. my current fha rate is 3.75.. the conventional rate will be 5 because my credit it's not that high (640). My home is a two family. And mortgage is 3150. With insurance included. Going conventional...it will go down to 2700 because there won't be PMI anymore So yes it sounds good. I'm going to save 400 dollars a month. But I want to make sure this is the right decision. Isn't 5 too high for interest rate even on conventional?
  • May 06 2014 - US
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Answers (7)

Many questions would still need to be answered to determine if refinancing would benefit you.  Saving $400 a month is a good thing, but what are the remaining interest costs and mortgage insurance costs over the life of your FHA mortgage vs the interest costs over the the life of a new conventional loan? 

-how long do you plan on keeping your 2 family home?
-what month and year did you get your FHA mortgage and what was your original loan amount?  This will help determine the amount of interest costs you have remaining to pay over the life of your loan.  Then you can compare this interest cost to the amount of interest you will over the life of your new loan. 
-Would you be going back into a 30 year fixed with the conventional mortgage or shortening the term of the new loan?
-what is your current balance on the mortgage? 
-Depending on when you obtained your FHA mortgage (if preJune 2013), you may get rid of the FHA mortgage insurance automatically by 1) your loan to value reaches 78% of what you paid for your home or 2) if you think your current mortgage balance is at 80% of your home's CURRENT value you can contact your mortgage holder who will probably order an appraisal. You are obligated, however, to pay the FHA mortgage insurance for at least 5 years regardless of the home's loan-to-value. 
-Depending on what month and year you started your FHA mortgage, I would also compare the total interest costs over the life of the loan by making bi-monthly payments with your current FHA loan vs to the refinance into a conventional loan.

If you purchased your 2 family home after June 2013, then refinancing would probably make good sense (since the FHA monthly mortgage insurance payment is for the life of the mortgage).  But I am guessing it was well prior to last year since since you are considering a conventional loan which requires you to have 20% to 25% equity in your home.

Finally, the rate you are being offered is in the ballpark since it is based on your credit score, the property being a 2 family vs a single family, and your current loan to value (which is unknown). 

  • May 06 2014
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Well I really don't know much. The loan is for 390k..and my current balance 385 but the actual cost of the house is probably over 550k now..
  • May 06 2014
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Lots of layers to the pricing to that loan given the FICO Score and 2 Family.  I am assuming your LTV is at 80% or under since  you mention mortgage insurance going away.  Really important to look at it side by side to make a educated decision.  Would be happy to help if you would like to contact me through my profile.
  • May 06 2014
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I will usually recommend conventional over FHA if the borrower has the opportunity. As you can tell, conventional can save you money by not having the mortgage insurance. Although, if you believe that your rate is too high, to feel free to check out multiple lenders to see what else you can get. The best thing for you to do is to speak with another knowledgeable lender to see if you can get started on financing a new home. If you need additional assistance, feel free to reach out. Good luck!
  • May 06 2014
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Assuming you bought the property in the last 2 yrs, the FHA MIP would be 1.25% or higher.  Going to a conventional refinance at 5% with no MI (20% equity) would make your payment approx. $130 less than current payment with MIP.  Not sure where the $400 savings came from, unless you calculated new loan rate at 3.75%. A 640 credit score would increase the 740 best rate credit score rate .50% or more.
If primary reason to refinance is to take aunt off the loan a $130 monthly savings would be a 3 yr payback.......
  • May 06 2014
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You kind of answered your own question. Your saving money but not sure if you should because the rate is higher.

Don't get fixated on the rate. Times are different now and the market is worse and not going to be as low as it was 2 years ago so in your situation, this is the best deal. You may be able to shop around and get maybe an eight or .125 percent lower but that is it. Going conventional and still saving a ton of money is a good thing.

I understand your concern and/or question but people get fixated and just the rate and not the benefit of the big picture. I would refinance because in the long run you will be in a better position in a conventional loan and the rates are not going down so save as much as you can now before they go up!

If you need more help I am located in NJ as well and can guide you more.

Good luck and best wishes!
-Scott
  • May 06 2014
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5% for 2 Unit and 640 FICO score is not unreasonable.   You haven't mentioned the expected loan to value so that is certainly a factor.  

I'm surprised you are seeing that much savings with big spike to interest rate, make sure to compare your current principal and interest + mortgage insurance to the new principal and interest to get the best depiction of the actual savings.
  • May 06 2014
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