FHA Refi - Lower Overall Pymt, Increased PMI - need advice

[EJ]

Searched the forum but couldn't find the answer on this...so here I am.  Need some advice on whether or not to refinance 4.5% FHA 30 year mortgage. 

Current Loan:
I'm 18 months in to a 30 year $273k 4.5% FHA mortgage

Current Payment breakdown:
$1387 - P&I
$  198 - PMI
$1585 - Total

New Loan:
3.25% 30 year FHA

New Payment Breakdown:
$1175 - P&I
$  270 - PMI
$1445 - Total

Positives
+save $140/month to invest elsewhere
+no closing costs
+faster paydown of principal with lower int. rate

Negatives
-resets PMI clock (min of 5 years)
-upfront MIP added to balance of loan (increases loan approx $3k)
-lower tax deduction

Additional facts
Looking to move in 3-4 years (currently would be eligible to get out of PMI in 3.5 years.  However LTV needs to be 78%, will not be there in 3.5 years unless I aggressively pay down the mortgage as I'm at about 100% LTV currently.  The one thing I'm considering is holding this property as a rental when we move in 4 years - in which case, I'd really like to have the PMI out of the way.

So do I refinance to 3.25% with higher PMI or stay in the current 4.5% loan?

[velocistar237]

http://www.mtgprofessor.com/calculators/Calculator3a.html

What sort of place would you move into in 3-4 years? Would you be downsizing, relocating, etc.?

Do you have any savings or investments to throw at the mortgage?

Looking at these numbers, you weren't financially ready to buy, and your best option might be to sell now at a loss and rent until you save enough for a down payment. Otherwise, your finances might be tight for much longer. $3k is a good chunk of the realtor's fee.

[EJ]

We would need a bigger house in 3-4 years.  Planning to save $80k by that time for down payment.

I do have some cash ($20k) and stock ($20k) that i could put toward the mortgage.  these are earmarked as emergency funds/savings.

Are we in an emergency?  should I throw cash at this mortgage to try to get in to a conventional loan to eliminate PMI?  i ran some numbers and it would save me approx $20k over the next three years but then I'd be left with zero emergency fund (have roth ira contributions I could fall back on and $12k bonus coming up in Feb.)

[velocistar237]

What about this: pay down to 90% LTV and refinance to a conventional loan. Your PMI would be about $80/month, and there would be no 5-year clock. You would still have about $10K left over for an emergency fund after pay-down and closing costs. With a monthly payment of about $1055 P&I and $80 PMI = $1135, your stash would bounce back quickly.

If that doesn't work, then go through with your FHA refinance. It's better than your current loan.

We would need a bigger house in 3-4 years.  Planning to save $80k by that time for down payment.

The transaction costs for selling a house are pretty high. Any chance you could make your current house work for longer?

[EJ]

I just don't think we will be able to make this house work for much longer (2br up, 1br down) planning to have 3 kids.  I'm hopeful that I can refi in to a conventional at a low rate to eliminate the PMI then potentially rent the house once we move in 3-4 years.

[twinge]

I just don't think we will be able to make this house work for much longer (2br up, 1br down) planning to have 3 kids.

If you have 3 kids, at least 2 will be of the same gender and can share a room indefinitely.  I have found it's really valuable to be imaginative about how a house can be made to work.  Smaller houses reduce costs in so many ways.  If you want to switch it to a rental, be sure that it actually makes sense from an investment perspective.  Many houses don't.  Also, investigate how property taxes/insurance shift when a house is not your primary dwelling--in my area they go up considerably.  We had thought about renting out our house if and when we had to move and found that it really wasn't going to make financial sense once we considered taxes, insurance, vacancies, depreciation, maintenance costs etc.

[velocistar237]

Do you work from home and need more than a desk in the bedroom? Do your parents or in-laws stay with you for weeks at a time?

This isn't for everyone, but we have a two bedroom condo for our family of five. There are upsides and downsides, and on the balance it doesn't make sense to work another few years for a more expensive house. We plan to stay here at least for another 8 years.

Even if you do decide to upgrade, you won't need to for a long time. Little kids certainly don't need their own rooms.

[EJ]

I agree velocistar and twinge - we need to be flexible and stay in the house as long as possible.  We're in one of the best school districts in the state and taxes are only $2,600/yr (2,000 sq ft home on 1 acre in large metropolitan area) - as I type that I'm really wondering why I'd ever need a bigger house??? I guess that's the jr. mustachian in me - please forgive me folks. 

Decision
We've decided to pay approx. $30k in to the mortgage in order to transition to a conventional loan and eliminate PMI.  As an added bonus, we will have savings of $450/month which equates to 18% guaranteed annual ROI ($5,400/30k = 18% - thanks for the pointer, Arebelspy!).  As this is equity we're gaining in the home, I see this as a great opportunity to get out from under PMI and "earn" a good return on that money (currently sitting in cash and brokerage account) and I can replenish the $30k stash in 8 months.

Thanks for the tips - I'm really grateful to be able to bounce ideas off people in this forum.  I think we need to do a MMM meet-up at some point - has that been done yet in any city?

[velocistar237]

Way to be decisive!

Thanks for the tips - I'm really grateful to be able to bounce ideas off people in this forum.  I think we need to do a MMM meet-up at some point - has that been done yet in any city?

We've had two here in Boston. Check the meet-ups section of the forum for mentions of your area. If you can't find it, start a thread and float the idea. It's pretty simple to meet over beers or host a potluck.

[KENlawrence]

I think it would be best to ask a mortgage adviser for your situation. I was also going through hard times way back then about our mortgage loan. Good thing we met a broker at Prospect Mortgage and helped us generously. It took two weeks before our refinance loan was approved; it’s okay because we didn’t end up being homeless.