The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: .22guy on December 01, 2015, 11:38:02 AM
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Hey all,
I don't post much these days but I pop in pretty often to get a dose of mustachian-ism. I have a refi question and would like some input because I just can't decide what is best. I wasn't sure if I should have put this here or the Real Estate forum.
Current Loan: FHA
Principal: 165,200
Rate 3.75
P&I: 782
PMI: 174.96
Total Payment: 1250
Proposed Refi: Conventional
Principal: 164,917
Rate 4.375
P&I: 823.41
PMI: gone
Total Payment: 1133
It seems like a no-brainer and I can apparently skip two payments which will be nice for me to stash that money away and buy a couple Christmas and birthday presents for my kids. All with no out of pocket expense. I've only been paying on this mortgage since August of 2014.
However, I was raised to believe that if something is too good to be true, it probably is. If you have any thoughts or some kind of calculation tool, I would greatly appreciate it!!!
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This is what I would do:
Find out how much you would have to pay the FHA loan down to get rid of the PMI.
If possible, pay it down with funds on hand and drop PMI. This will lower your payment $175/mo. Lender may also offer option to re-amortize the loan based on the principal reduction which may lower our payment further.
If you don't have the cash on hand, look into taking out a second loan to pay down the first. Crazy as it sounds, sometimes it is worth paying 10%+ on a second loan to drop PMI. Let me know how much you need to pay down and I can calculate what rate you would need to get to be ahead.
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Can you drop the PMI on FHA now? I thought I read that on new(er) loans PMI stayed for the life of the loan. If you can drop it, it takes 5 years (I know from recent experience on a loan that dropped FHA PMI this January even though LTV was about 50% at that point).
If not, $175/mo is a lot to pay for PMI. As you pay down the principal the PMI should drop a bit too, but it's essentially raising your rate considerably.
Your payment is also smaller because you are essentially adding 1.5 years to the amortization of the loan, but getting rid of PMI is worth it.
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Pretty sure my current FHA is lifetime PMI.
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Pretty sure my current FHA is lifetime PMI.
In that case, refi.
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Pretty sure my current FHA is lifetime PMI.
In that case, refi.
....but look for a better deal ;)
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It was a very very sad thing to see FHA stick it to new borrowers in an effort to pay for the poor management of FHA over the last 10-15 years. To force borrowers to pay thousands in either closing costs or in higher interest payment with higher rate from a no closing costs refi is just terrible.
That all said, good advice so far above. I think your options are:
1. Fully verify if you can or cannot get out of PMI
2. If yes, this is usually done via an appraisal showing your current mortgage balance is 78-80% of the appraised value. The % can differ by lender so verify this too. Also verify if you can choose the appraiser or it the lender must do it.
3. If no, remember this and do all that you can to avoid FHA loans until the Gov't Agency changes its policy on this. Begin research on refi options ONLY if you plan to stay in the home more many more years than it take to recoup the closing costs -or- or less years than the higher rate of a no closing cost loan takes to pass the total closing costs.
If you go the refi route, be ruthless on your comparison and price shopping. Not rude but rutheless. You do not own any lender anything more than the best deal that you can get in rate, fees, and service.