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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: LimaDon on October 27, 2015, 08:48:08 AM
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Hey Mustachians!
Need some advice on refinancing. We purchased our home in December 2014, and are currently paying about $100/mo in PMI (shame on me for not putting 20% down). Since we bought the home, we've put roughly $30k in renovations in and the value has increased at least $50k (or $90k if you'd go by the ridiculous Zillow estimate).
I have an opportunity to refinance the home for $960 (if LTV ends up being 80%) or $375 (if LTV ends up being 75%). The mortgage rates are the same as when I closed last year. It seems like a no brainer investment to refi and recoup my closing costs within 1 year of not having PMI (plus getting an extra mortgage payment in the month after we close when it is not required).
My question is: I understand that the interest is front loaded on the amortizations schedule and I wonder if restarting that heavy up front interest will cannibalize the savings from the PMI.
I should say my other option is to wait until December 2016 when I can get a reassessment for $250 on the current mortgage and lose PMI if LTV is 80% without refinancing. So my 2 options are Refi now to lose PMI, or keep paying PMI for at least another 14 months and lose PMI on existing mortgage with a reassessment.
Sorry to be long winded and thanks for the guidance here!
Don
Quick Info:
Home Purchase Price: $250k
Loan Amount: $237.5k
Rate: 3.75% for 30 years
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Every time you refi, you hit the high interest first schedule to begin all over. Of course, if you are going to rock this mortgage by pre-paying enormously, that shouldn't make that big a difference to you. Nonetheless, I'd wait until Dec. 2016 and focus on pre-paying as much principal as possible in the meantime, rather than relying on some conservative appraiser's assessment of the value of your improvements. Use that ("shameful," as you described it) PMI payment to motivate you to pay ahead, pay ahead, pay ahead. Good luck.
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Will your lender allow an updated appraisal for purposes of dropping PMI?
http://www.bankrate.com/finance/mortgages/removing-private-mortgage-insurance.aspx
You may not need to refinance.
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My question is: I understand that the interest is front loaded on the amortizations schedule and I wonder if restarting that heavy up front interest will cannibalize the savings from the PMI.
Every time you refi, you hit the high interest first schedule to begin all over.
Perhaps I'm misunderstanding what you are both saying. If, however, you are both saying that you pay a higher interest rate at the beginning of a mortgage, then that is incorrect.
In a conventional home mortgage, you are always paying exactly the same interest rate on the remaining principal. Yes, the fraction of your payment that is interest is highest initially but that is because the remaining principal is highest initially.
Ignoring PMI, if you refinance exactly the same amount currently due on your existing mortgage, for the same interest rate, and for the same time remaining on your existing mortgage, your payment will not change and the amount of your first payment on the refinanced mortgage going to interest will be slightly less than the amount that went to interest on the last payment of the existing mortgage.