Author Topic: Refi Dilemma  (Read 4978 times)

shredder112233

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Refi Dilemma
« on: October 17, 2012, 10:56:16 PM »
Hello Mustachians,

Young saver here who has been working to get my financial life under track.  The past 9 months since I've discovered MMM I've really been optimizing my spending and financial plan.  I have eliminated all debt from my life (except mortgage), and aggressively reduced my consumerist spending.  I live in Las Vegas and shortly after graduating college I felt like buying a house was the thing to do.  I do love my house, and plan on staying in it forever or if I do move to use it as a rental property.  I don't plan on selling my house during my lifetime.  Unfortunately I bought the house before I had discovered MMM and so I only put down 3.5% on a 146k loan FHA.  I am unsure rather it is wise now to save the extra to refi and get rid of PMI or just continue my strategy of very aggressive investing.  A bit about my financials:

Single, Male, 24
Gross Salaray: 80k year + ~10-15k contracting work throughout the year.
Debt:  144k mortgage @ 3.875%, House value 149k (according to zillow).
401k: 17k
Rother IRA: 5k
Taxable: 7.5k
Cash/Emergency: 10k

Sometimes I have trouble "thinking" my way through a financial decision and coming to a conclusion myself, so I'm interested in seeing how you guys would approach this?  Would it be wise to hold off my taxable investing for half a year or so in order to refi, or just keep aggressively investing and "leverage" as they say?

For some reason after all my cost savings cuts the PMI payment bugs me a lot :)

Thanks!

Able was I ERE

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Re: Refi Dilemma
« Reply #1 on: October 18, 2012, 05:43:45 AM »
I am unsure rather it is wise now to save the extra to refi and get rid of PMI or just continue my strategy of very aggressive investing. 

How much is the PMI and how much would you need to pay off to get rid of it? 

I think of PMI as extra interest on the amount left to pay off in order to get rid of it.  For example, if you have to pay $100 / mo in PMI, and you need to pay $24k to get rid of it, then the extra "interest rate" is:
  $100 / mo * 12 mo / yr => $1200 / yr
  then $1200 / $24000 => an extra 5% interest rate on the amount

With a 3.5% mortgage rate, that would mean you're paying an effective interest rate of 8.5% on the $24k.

Post your numbers and we can figure out your effective interest rate on the PMI part of your mortgage.

shredder112233

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Re: Refi Dilemma
« Reply #2 on: October 18, 2012, 09:54:37 AM »
Thanks Able,

I would need roughly 25k to get to 78% to get rid of the ~ $120 a month in PMI.  Right now my house payment is 991/m, so I believe the refi should significantly reduce my house payment, and in the future if I move on, would keep the payment low enough to have good cash flow as a rental.  Of course saving this 25k would mean I couldn't invest heavily for 4-5 months.

freelancerNfulltimer

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Re: Refi Dilemma
« Reply #3 on: October 18, 2012, 10:33:51 AM »
Zillow is not an accurate estimation of what your house is worth. If you want to know the real number hire an appraiser.

However it doesn't matter with an FHA loan, because they will not use an appraisal to figure out your loan to value. They go off of the purchase price. What did you originally buy it for?

Are you looking to refinance into a traditional mortgage?

If you refinance into a new FHA loan, you reset the clock on when the PMI can drop off and you have to repay the upfront MIP payment which is a percentage of the purchase price and it gets added to the loan value if you don't pay it out of pocket. So it only make sense to refi if you have the cash to pay down the balance enough at that time. Which is sounds like you're wanting to do, but just wanted to mention the clock reset.

3.875 is a pretty good rate. I'm doing an FHA streamline refinance right now and the lowest I got quoted was 3.5% with closing costs and 3.75% without cc. On the P+I on the original loan balance you'd save $31 a month and about $10,000 in interest over the course of the loan. What would your closing costs be?

How far are you into the loan? Would you be refinancing 30 years or a shorter term?


shredder112233

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Re: Refi Dilemma
« Reply #4 on: October 18, 2012, 12:11:50 PM »
I would be looking at a refi into a traditional mortgage.  I've only had the loan for ~ 9 months.  The loan was originally for 147k.  I would refinance at 30 years.  And yes, I would be putting a large amount down on the new loan in order to get rid of the PMI payments.

freelancerNfulltimer

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Re: Refi Dilemma
« Reply #5 on: October 18, 2012, 01:56:46 PM »
I would get quotes on both a Streamline Refinance and a Traditional Refinance. I just did the comparison and I got a better rate with the FHA refinance. Obviously your situation might be different.

TomTX

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Re: Refi Dilemma
« Reply #6 on: October 19, 2012, 03:57:16 PM »
I would seriously investigate local credit unions, and see how good of a deal (Good Faith Estimate) I could get for a refi.

PMI is pure evil.