Author Topic: Worked out my refi vs investing numbers  (Read 1475 times)

ETBen

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Worked out my refi vs investing numbers
« on: August 31, 2016, 08:59:11 AM »
Can I get a second set of eyes on this, or more haha. I'm pretty proud of myself for thinking this through. Hopefully i am right.

I want to refi to remove PMI. With a new FHA, you have to refi to remove it.

Looking to stay in home at least 10 more years. Only way I see that changing is if I lost my mind and got remarried to someone with kids and we needed more rooms. :)

Refi will cost me about $10k if I need to put any into it. With the FHA, I only had 3.5%. It needs 95% LTV. It's only been a year so it may appraise but not sure. If I don't need to put money into, then woohoo it's only closing costs.

Numbers below are only the refi situation, no other savings etc included.

Option 1: Refi.
- I will save $200 per month.
- The earn back period on my $10k, at $200 per month is 4y2m.
- investing my $200 per month at a conservative 5% return would come to approx $11,100 in 4 yrs.
- in 10 years that $200 per month is at $31k.

Option 2: no refi
- I continued to waste $200 per month on PMI
- I put 10k into investments "today."
- I don't factor any other contributions bc this is an isolated calculation.
- in 4 years, it grows to $12k
- after 4 years, I still don't have that extra $200 to contribute bc I still have PMI. So my original 10k keeps growing.
- in 10 years, I have $16,300


So Refi clearly wins, right??  In 4 years, I come out a little better with not refinancing but definitely not after that.

TheAnonOne

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Re: Worked out my refi vs investing numbers
« Reply #1 on: August 31, 2016, 09:20:27 AM »
Those are not your only two options.

*You might be able to pay down mortgage 1 and remove PMI that way.
*You might get denied the refi (due to not having 95%) and you might only be a year or two away (I suspect this is better than paying now to refi)

Are you getting a better interest rate? This could be HUGE.

ETBen

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Re: Worked out my refi vs investing numbers
« Reply #2 on: August 31, 2016, 09:34:27 AM »
Those are not your only two options.

*You might be able to pay down mortgage 1 and remove PMI that way.
*You might get denied the refi (due to not having 95%) and you might only be a year or two away (I suspect this is better than paying now to refi)

Are you getting a better interest rate? This could be HUGE.


Per above
With newer FHA, you cannot remove PMI, you must refi. PMI isn't removed by achieving a better LTV. It sucks but I went into it knowing this and wanting to provide some stability post divorce.

The purpose of paying in a few thousand is to have the 95% LTV in order to refi and do LPMI. Interest rate will be the same as I have now. This yields the $200 monthly savings from the PMI.

Axecleaver

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Re: Worked out my refi vs investing numbers
« Reply #3 on: August 31, 2016, 12:46:30 PM »
You're right about FHA rolling the PMI expense into the entire loan - that lasts until the whole loan is paid off, it's baked into the loan. Since FHA loans are all about low down payments, this makes sense for that loan product.

Typically you need an 80% LTV in order to eliminate PMI, and most people in FHA loans wait until they have that to refinance. If you're doing lender PMI (LPMI) they do the same thing - roll the cost of it into your loan. Typically they do this by offering you a higher interest rate, and paying the PMI for you. This may appear to be cheaper than what you're currently doing, but you still don't have much equity in the house, so you're going to be paying for that somewhere.

Take a look at what the rate would be for the refi, vs. what it would be with 20% down. That's your "cost" for the LPMI. It's not free. Compare that to doing a traditional mortgage with 5% down, paying the PMI directly, but on a lower rate. That might end up being cheaper for you, you'll lock in a great rate, and you have a path to eliminating the PMI on your new loan eventually.

ETBen

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Re: Worked out my refi vs investing numbers
« Reply #4 on: August 31, 2016, 01:32:57 PM »
You're right about FHA rolling the PMI expense into the entire loan - that lasts until the whole loan is paid off, it's baked into the loan. Since FHA loans are all about low down payments, this makes sense for that loan product.

Typically you need an 80% LTV in order to eliminate PMI, and most people in FHA loans wait until they have that to refinance. If you're doing lender PMI (LPMI) they do the same thing - roll the cost of it into your loan. Typically they do this by offering you a higher interest rate, and paying the PMI for you. This may appear to be cheaper than what you're currently doing, but you still don't have much equity in the house, so you're going to be paying for that somewhere.

Take a look at what the rate would be for the refi, vs. what it would be with 20% down. That's your "cost" for the LPMI. It's not free. Compare that to doing a traditional mortgage with 5% down, paying the PMI directly, but on a lower rate. That might end up being cheaper for you, you'll lock in a great rate, and you have a path to eliminating the PMI on your new loan eventually.


I have that estimate too but didn't really consider it. You bring a good point. With the traditional, 5% down, lower rate but traditional PMI, the payment is $10 more per month than if I do LPMI. (I am familiar with how LPMI works).  My townhome is condo, which also impacts my rate. Looks like a normal townhome, 2400sqft, but condo ownership, so the rate is a little higher.

So if I were to consider that option, I would only pay $10 more but that PMI is not tax deductible, whereas it is with the Refi option. I would reach 80% LTV in 7yrs, not accounting for increased value of the home. Looks not to be a good option.

Also, my plan is to move in 12-15 years to a lower cost of living area when my kids graduate. Assuming all goes according to plan. So I'd only be 1/3 to 1/2 into the mortgage term.