3.75 mortgage with PMI or refinance 4.4 no PMI

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mississippijim
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Joined: Wed Jun 13, 2018 5:29 am

3.75 mortgage with PMI or refinance 4.4 no PMI

Post by mississippijim » Wed Jun 13, 2018 5:56 am

I currently have a mortgage at 3.75% interest rate but I have to pay PMI indefinitely at approx. $125 a month. Would it make sense to refinance to a 4.4% mortgage? It will cost me approx. $20k to add to the principle including mortgage fees and points to get this rate. I'm just wondering if it would be better to keep the $20k as that would pay for many years of PMI and invest it instead. What would you do? I am selling a rental property which is freeing up about 50k in cash so i have options.

loan balance 177k
value of property approx. 205K

current P & I - $885 + PMI $125
future P & I - $818

Jags4186
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Joined: Wed Jun 18, 2014 7:12 pm

Re: 3.75 mortgage with PMI or refinance 4.4 no PMI

Post by Jags4186 » Wed Jun 13, 2018 6:15 am

mississippijim wrote:
Wed Jun 13, 2018 5:56 am
I currently have a mortgage at 3.75% interest rate but I have to pay PMI indefinitely at approx. $125 a month. Would it make sense to refinance to a 4.4% mortgage? It will cost me approx. $20k to add to the principle including mortgage fees and points to get this rate. I'm just wondering if it would be better to keep the $20k as that would pay for many years of PMI and invest it instead. What would you do? I am selling a rental property which is freeing up about 50k in cash so i have options.

loan balance 177k
value of property approx. 205K

current P & I - $885 + PMI $125
future P & I - $818
Why not just pay down your mortgage to the point where your lender will drop PMI? If you want a lower payment you could even ask your lender to recast your mortgage after making that $20k lump sum payment.

tenkuky
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Joined: Sun Dec 14, 2014 4:28 pm

Re: 3.75 mortgage with PMI or refinance 4.4 no PMI

Post by tenkuky » Wed Jun 13, 2018 6:23 am

Use the mortgage calculators here..
https://mtgprofessor.com/home.aspx
You can compare different rates, terms, paydown scenarios etc, as well as savings rates etc. I guess you could estimate an investment return for the savings rate and plug that in to see.
That can help you decide what works best from financial standpoint.

Dantes
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Joined: Wed Feb 25, 2015 6:38 pm

Re: 3.75 mortgage with PMI or refinance 4.4 no PMI

Post by Dantes » Wed Jun 13, 2018 6:33 am

I was unaware that private mortgage insurance could last indefinitely, but checking I see it does in some cases, such as FHA. One consequence of this is that if interest rates go up it may reach a point where its not worth refinancing to avoid the PMI.

Where is "future P & I - $818" coming from? Thats not your current balance plus 20K refinance costs at 4.4% for 30 years. Thats closer to your current balance at 4.4%.

I never encountered anything like a cost of $20,000 to refinance. Can you look for a different lender?

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jeffyscott
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Location: Wisconsin

Re: 3.75 mortgage with PMI or refinance 4.4 no PMI

Post by jeffyscott » Wed Jun 13, 2018 7:37 am

Dantes wrote:
Wed Jun 13, 2018 6:33 am
I never encountered anything like a cost of $20,000 to refinance. Can you look for a different lender?
That was my first thought, too...but rereading it I see that the $20K includes paying off part of the principle.

If the current lender will not allow dropping PMI, even if you pay off $50K of the loan, then I would compare the increased interest cost to the $125 per month. Putting the whole $50K to the current mortgage would reduce the balance to $127K and the interest would be $397 per month at the current rate. Going to a 4.4% rate would increase interest to $466 per month, so $69 which is much less than the PMI.

So it seems like you would come out ahead at the higher rate, with no PMI depending on the actual closing costs for refinancing and how long you will stay in the house. For example, since you would save about $800 per year if refinance cost is $800, you would be ahead after 1 year.

(If you can benefit from itemizing deductions that might change things a bit, but seems unlikely under the new tax laws.)
press on, regardless - John C. Bogle

mississippijim
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Joined: Wed Jun 13, 2018 5:29 am

Re: 3.75 mortgage with PMI or refinance 4.4 no PMI

Post by mississippijim » Wed Jun 13, 2018 12:11 pm

thanks guys for the confirmation. The approx. closing cost is $8,500. This includes buying about $5,000 worth of points to get the rate down to 4.125%. It looks like my payback period is approx. 6 years with these costs. (8,500 / $125 PMI)

I was looking further at a money market account to try to recoup the $125 a month. At the current interest rates (which should rise further) and it looks like another option would be to put all of $50k in a Marcus account (currently at 2.3% for 12 months). I could receive interest payments equal to the PMI I am paying. Of course there are tax implications etc but in a rising rate environment cash is king.

I'm leaning towards the refinance but wanted to exhaust all my options.

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jeffyscott
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Location: Wisconsin

Re: 3.75 mortgage with PMI or refinance 4.4 no PMI

Post by jeffyscott » Wed Jun 13, 2018 3:01 pm

Those high closing costs would change the increased interest to $99 per month in my calculation, while also increasing the balance by $8500. I get a 27 year payback as you save only $26 per month.

With those parameters, I would wait for a better deal, were me. The $8500 saved would cover the $125 per month for a few years.
press on, regardless - John C. Bogle

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