Mortgage PMI - Should I refi?

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mattyfu1
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Mortgage PMI - Should I refi?

Post by mattyfu1 » Mon Mar 20, 2017 11:32 am

Hello Everyone!

I currently have a $380,000 FHA mortgage with Chase - 30 year @ 3.5% (opened in Sept. of 2013)
PMI IS $408 a month and will be taken away Sept of 2018

-I plan on living in the house for no more than 5 years (more likely around 3 years)

Should I refinance to an ARM or conventional mortgage in order to drop that $400 hit every month?
Is there a calculator or formula I can use to crunch the numbers?

Thanks!

-Matt
VTI VXUS BND VYM

MuckB
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Re: Mortgage PMI - Should I refi?

Post by MuckB » Mon Mar 20, 2017 12:51 pm

Check your mortgage documents or call chase. You might be able to just get a new appraisal and drop your PMI if you're under the stated LTV limit. That way you keep the original terms of the loan and don't have to pay for all the closing costs on the refi. Same appraisal could also get you out of escrow requirement as well, but this all depends on how your mortgage was written.

SimonJester
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Re: Mortgage PMI - Should I refi?

Post by SimonJester » Mon Mar 20, 2017 1:16 pm

What is your current loan balance? Are you now below 80% if so you should be able to request cancellation.

What sort of rate could you get today on a 30 year conventional? I would not do an ARM rates are only going to go up from here...
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

forevernaive
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Re: Mortgage PMI - Should I refi?

Post by forevernaive » Mon Mar 20, 2017 2:55 pm

I agree the best thing to do is to ask the bank to drop the PMI if you can qualify via new appraisal, or for other reasons.

If the bank insists a refi is the only way to do this, be sure to insist you are giving them a chance to keep your loan before shopping elsewhere for a refi. Understand the incentives here: Loan officers make money when they close loans, and most likely won't make any if they modify yours to keep it--so they may not care.

Fixed refi vs fixed current refi is a relatively simple question--does it cost less in fees and interest to refi than you would save in dropping the PMI, and is that savings large enough to be worth the time and effort to bother with it? You need to get a good faith estimate to have a reasonable estimate of the fees.

As I see it, that decision depends on whether $408/mo * 15 months (or $6120) would be greater than the cost of closing the refi, plus or minus the change due to the new interest rate/amortization schedule. I am assuming 15 months savings because of the time needed to apply and close a loan and your stated end date of Sept 2018--maybe it could be a month more. (Note that this is a bit simplistic--keep in mind this is before considering taxes, such as whether your PMI is tax-deductible or not (which varies, check on your tax return/software), and the changes to your deductions at your marginal tax rate, etc. Then there is the opportunity cost/gain of you investing any savings from a lower payment earlier--depending on what you will do with the savings, of course.)

The second decision between refi-ing with an ARM and fixed is harder to model. But note that the savings between those two options (as opposed to the savings from doing any refi at all vs continuing to pay PMI) would have to be considerable to merit an ARM given today's historically low interest rates and your estimate of the risk of them rising. And I know you said you plan to move, but plans change. Real estate markets go down and even moribund, you might decide to keep it as a rental, etc.

Much depends on the terms of the ARM, not just whether it is a 1/1, 3/1, 5/1 or 7/1 and so forth. You should make sure to understand what the initial adjustment can do (e.g. goes up immediately to the index + margin, or does it have an initial adjustment cap?), what the readjustment period is (yearly), the maximum rate adjustment (cap) per period (e.g. 1%), what the maximum lifetime adjustment cap is (e.g 9.5%), etc.

Then I'd run the worst case ARM numbers in the spreadsheet, and compare it to the current and proposed fixed. For a 5/1, you'd save the difference in two payments for 60 months. During that time your principal would diminish. Then your payment would presumably jump up in a worst case scenario, and you'd have to start subtracting the difference from the initial savings. Keeping in mind your rate adjustment period and the maximum rate it can rise, continue to model until you find your worst-case, break-even point. Now the break-even point might well be longer than that if interest rates don't go sky-high immediately and stay there, but ... you are modeling your worst-case scenario.

Personally, I ran such a worst-case ARM v. fixed refi spreadsheet once on a rental property I had purchased with an ARM, and with the loan I had I came to the conclusion it was a wash and wasn't worth doing. Of course, I had the luxury of having the cash on hand to consider paying it off immediately if needed, should rates have gone up significantly. That made it an easy decision--I kept the ARM and gambled on lower rates. And gambled is the key word here.

In the current rate environment (low rates plus a significant chance they may rise), I'd only recommend the ARM if you could do something similar. My opinion is that you should forget about the ARM option and just look at a fixed rate refi vs keeping the current loan. It will take way less time to model. And given you only plan to harvest any savings between the ARM and fixed rates for 3-5 years, the ARM bet is even less attractive.

But the PMI removal is possibly still attractive. Just treat them as two independent questions.

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mattyfu1
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Re: Mortgage PMI - Should I refi?

Post by mattyfu1 » Tue Mar 21, 2017 7:09 am

Thank you everyone for the info !

I have met all requirements, except for the 5 year length of loan. I think I am just going to wait it out.

Best,

Matt
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mattyfu1
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Re: Mortgage PMI - Should I refi?

Post by mattyfu1 » Tue Mar 21, 2017 7:40 am

SimonJester wrote:What is your current loan balance? Are you now below 80% if so you should be able to request cancellation.

What sort of rate could you get today on a 30 year conventional? I would not do an ARM rates are only going to go up from here...


I meet all requirements except a 5 year length of loan.
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SimonJester
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Re: Mortgage PMI - Should I refi?

Post by SimonJester » Tue Mar 21, 2017 7:55 am

mattyfu1 wrote:
SimonJester wrote:What is your current loan balance? Are you now below 80% if so you should be able to request cancellation.

What sort of rate could you get today on a 30 year conventional? I would not do an ARM rates are only going to go up from here...


I meet all requirements except a 5 year length of loan.



I would call your mortgage company and see if it can be removed. Mine would not take increased value or a new appraisal for removal of PMI. They would only remove it when my balance was below 80% of the original loan amount. You may just have to wait the 18 months, if you refinance to get rid of it you are likely going to have a higher interest rate. That plus closing costs are going to take away any saving...


You might look into a 15 year loan, you would need to run the numbers to see if it makes sense...
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

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jimb_fromATL
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Re: Mortgage PMI - Should I refi?

Post by jimb_fromATL » Tue Mar 21, 2017 11:14 am

mattyfu1 wrote:I currently have a $380,000 FHA mortgage with Chase - 30 year @ 3.5% (opened in Sept. of 2013)PMI IS $408 a month and will be taken away Sept of 2018
I meet all requirements except a 5 year length of loan.



Are you sure that's an FHA loan and/or sure of the date you closed? The rules for PMI changed for FHA loans for the date you stated. According to the table HERE, depending on how much you paid down, the PMI on FHA loans extended the cutoff date from 5 years to 11 years at the earliest, or maybe never.

Term ≤ 15 years LTV%= ≤ 78% Previous= no annual MIP New= 11 years
Term ≤ 15 years LTV%= 78.01% to 90% Previous= cancelled at 78% New= LTV 11 years
Term ≤ 15 years LTV%= > 90% Previous= loan term New=loan term
Term > 15 years LTV%= ≤ 78% Previous= 5 years New= 11 years
Term > 15 years LTV%= 78.01% to 90% Previous= cancelled at 78% LTV and 5 years New= 11 years
Term > 15 years LTV%= > 90% Previous= cancelled at 78% LTV and 5 years New= loan term

It's not clear whether $380K is the original or current loan balance.
What are they both?

How much did you pay for the home?

How much will it appraise for now? In order to refinance without PMI, the new balance will have to be no more than 80% of the new appraised price. Or have you paid extra on the principal?

Closing costs are typically in the range of 1.5% of the amount financed, and will either be paid up front, rolled into a higher loan balance, or hidden in a slightly higher rate. Plus, rates are going up. So it's going to take some very accurate information about closing costs and the new rate to determine whether removing the PMI would save as much as you'd pay in closing costs and possibly a higher rate on the loan itself.

Do you have the cash on hand to spare to pay the closing costs up front? If so, another question is whether paying it extra on the current mortgage might save enough interest to make up for the PMI versus closing costs, especially if you're not going to own the home for a considerable length of time.

jimb

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