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Should I refinance to drop my FHA 203k Mortgage Insurance?

On August 2012, I closed on my FHA 203k refinance to dig out the crawl space underneath my Washington DC townhouse and turn it into a one bedroom basement apartment. My rate was 3.75% for about 410k. The amount I borrowed for construction was $138,000 (including $18,000 contingency). This came to with $1881 principle/interest. PMI is an additional $399 per month.

After lots of drama, the construction is finally complete and I am considering refinancing. Rates are now about 4.375% - 4.5%. My house will likely be valued at 500 - 550k.

I hear that because of when I refinanced, my FHA Mortgage Insurance will be required for a full 60 months (5 years) regardless of the current value of my house. Since $399 for another 3.5 years is almost $17000, I figure it really is worth it even if mortgage rates are about .75% higher.

But I wonder if I am missing something...I have no plans on ever (at least not in the short or long term) selling the house. Would love some advice (I have excellent credit)...thanks!



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January 01 - Petworth
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Answers (11)

Nadia, going to a Conventional loan works in the short term but you will not be saving $17,000.
Using a new loan of $400K at 4.5% without MI, a new principal & interest payment would be $2026.74. Your current P & I is $1881.64 plus $399 MI, total of $2280.64 so while you would eliminate the $399 MI payment, your net savings would be $253.90. Your current payment of $1881.64 has $643.28  Principal and $1238.36 Interest, the new loan would start with $526.74 Principal and $1500 Interest so you lose $116.54/month in Principal reduction which lowers the net benefit to $137.36. The additional interest paid will yield a higher tax deduction, I am not a CPA but using a 28% tax bracket you should realize aprx $879/year which would bump the net benefit up to $210.61/mo or $9056 over 3.5 years. This assumes your AGI is too high to deduct the MI, is it? If you are income qualifying to deduct the MI then that would take away aprx $111/mo from the net benefit for 2013. If you are getting Conventional quotes ask for an amortization schedule so your tax preparer can compare that to your existing am schedule to give you an exact benefit analysis.                   
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January 05
Hi, Nadia. Yes, the FHA loan you have requires you to keep the mortgage insurance for at least five years no matter the balance (since your refinance, FHA has gone to making the mortgage insurance permanent in most cases!). According to what you have listed, you are currently under 80% loan-to-value and should ideally be able to refinance with no mortgage insurance at all. You would have to weigh the immediate monthly savings against the long-term to see if a refinance truly makes sense for you.

Find a lender in your area that you trust to give you all your options and then make an informed decision.

Congratulations on finally completing the construction, and good luck in your refinance quest!
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January 03
If you have sufficient value to avoid mortgage insurance, it would definetly be worth looking into. Nobody posted about the ability to write off the interest on the new loan vs. not being able to write off the MIP. I'm assuming with the loan balance that your income would preclude you from the MI write off. Rates are moving quickly, so now may be the time to take advantage of a refi.
I'm here to help,
Paul
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January 03
It seems that you have a good possibility of saving money in this situation. So it would be worth it, to look further into it. Although rates may be higher, you should have a chance at saving money by avoiding the mortgage insurance. This is not for sure and require more information and comparison, but it's worth the shot of looking more into it. Either way, the best thing for you to do is to speak with a lender directly to see if you can get started on refinancing with your situation or advice on what to do next. There are lenders like myself that would be glad to speak with you to help you get the refinancing that you need. Well I hope this helps! If you have any further questions or if you would like a loan, feel free to contact me.

Good Luck!
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January 02
Based on the numbers it sounds like it is at least worth it to look at the numbers.  You probably have enough room to roll in the closing costs so that your out of pocket is minimal.
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January 02
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Thanks for all of the comments.

In response to Clay Branch, my current loan balance is 395k. I'll have to get an appraisal done, but the FHA 203k appraisal used a "Cost approach to value" (not sure what that means) and estimated the after improvements, the value would be $574,000. I think this might be on the high side, and that it might appraise for between $500k - 550k.

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January 02
NADIA759- I am a licensed loan officer for the D.C. area and have originated hundreds of FHA203k Mortgages and to answer your question  "YES" we have had client refinance their FHA Mortgage to lower/avoid monthly PMI by moving it to a conventional loan even when the rate was slightly higher.  NOw I cannot state this would work for you but if you want to inbox me at [spam removed by Zillow moderator, see our Good Neighbor Policy] and give me your contact number I can call you to discuss further with more logistics.
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January 02
If you have the value to avoid PMI completely, it is probably worth refinancing even though the rates are higher.  Really need to see both loans side by side so that you can see not only your short term savings on a monthly basis but also long term.  If you would like to contact me through my profile I can put you in touch with a experienced loan officer in my group to help.
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January 02
You should definitely shop around for a lender to refinance. You can also go back to your title attorney and negotiate to save on some title fees to handle the refi. Don't forget to ask for reissue rates on your title insurance policy. There is typically a 3-day recision period after you complete the refi to be sure you are satisfied. Bottom line, a good renovation project should have helped you create enough value so that a refi can save you thousands when you are done. This should be something people discuss with their renovation consultant at the onset of their project. Best wishes in 2014 Vito Simone Renovation Consultant
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January 02
What was the appraised value used and what is the current loan balance?
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January 02
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I should add that I realize that closing cost will have to be taken into account (I estimate they might be around 7-8k). But it still seems that I'll be saving by dropping the mortgage insurance even with the higher mortgage rates as I'll be able to put the cash I currently pay as MI into my principle...
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January 01
 
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