Should I Refinance?

[chewdaman]

My wife filled out a form on LendingTree last week to get quotes for refinancing our home. She is pretty dead set on wanting to do it but I am a little hesitant so I am looking for some advice from people who know a lot more than she and I do.

Here is our current situation.

Purchased home in March 2012
Current mortgage balance: $158,277
Current monthly mortgage payment: $1,127
Current interest rate: 3.5%
30 year mortage

I love the 3.5% interest rate, the problem is that it is an FHA loan and we have a monthly mortgage insurance payment of roughly $155. My dad has been a real estate agent in the area for over 20 years, and he told me that based on recent appraisals he has seen on houses in our neighborhood, our house would easily appraise for over $240,000, probably closer to $250,000. This puts our equity right now at roughly 34-37%. We definitely have the equity to not need mortgage insurance, but since its an FHA loan I don't know if there any way to get rid of it any sooner than 5 years.

The main reasons my wife wants to refinance are to get rid of the MIP and to consolidate some of our other debt, mostly our $15,000 in credit card debt that we built up in our younger dumber days. The credit card payments are roughly $300/month. She also wants to get roughly $10,000 in cash so we can make some home improvements.

My wife tried to talk me into agreeing on a refinance yesterday with a guy who had contacted her from LendingTree. He offered us a $190,000 mortgage so we could cover the credit card debt and get the cash for home upgrades, but said we would be required to do bi weekly payments and the rate would be 4.75%. I am just scared to commit without knowing if it's our best option or not.

What does everyone think? Did my wife do her research and it seems like the best plan is to refinance, or would doing some kind of home equity line of credit or something else make more sense for us in the long run? Thank you so much for reading.

[Petunia 100]

Are you and your wife on a budget now? If there is still a spending problem, then IMO it is very unwise to borrow against your home to cover a spending problem.

Your rate now is quite good, and you will likely not be able to match it. Paying MIP is a good reason to look into a refi, but do the math first. You have 36 more months of $155 to go? That amounts to $5,580. If you can refi for less than $5,580, it is worth considering. However, you must also consider your new rate and the fact that you will be re-setting your mortgage clock. To go from 3.5% to 4.75% is a very big jump, and will cost you much more than $5,580 in the long run. Personally, I would not consider this particular refi.

It is possible you could find a better rate than the Lending Tree referral is offering.

How is your credit card debt financed? There are an awful lot of 0% balance transfer offers out there. If you are paying interest, you should consider transferring the balance elsewhere.

Unless the home improvements you want to do are of a nature they need to be done ASAP, they should wait until you can pay for them, IMO. Once the MIP and credit card debt are behind you, it will be easy enough to save up for the home improvements.

[dczech09]

I am guessing that $1,127 monthly payment includes PMI (or MIP as you call it), taxes, and insurance? Seems a little high on a 30 year loan for $158,277.

I would not do this refi. First of all, I hate 30 year mortgages. If you could refi to a 15 year and afford the payments, that may be an idea. Just for fun, I calculated a monthly payment of $1,131 on a 15 year refi assuming the same 3.50% APR (not including taxes and insurance).

Second of all, putting credit card debt onto your house is not really that good of an idea. All you are doing is moving debt, and worse of all, you are putting your house at risk for steak dinners or whatever the credit card was used for.

Finally, by moving from 3.5% to 4.75%, your potential interest would increase by $41,000 over the life of the loan! Pretty big considering your savings for dropping PMI!

You need to stop using credit cards, then pay off the balance and stay out of debt.

As for home improvements- unless your roof is leaking, your home improvements are likely luxuries, not necessities. Luxuries are for surplus wealth/income. You do not focus on luxuries when you are working on paying off debt.

As for PMI, you are stuck with it for now. FHA requirement stay that PMI is charged on ...
Mortgages when the loan-to-value ratio is 80% or higher
If loan-to-value at inception is 90% or higher, then PMI is required for the life of the loan
If loan-to-value at inception is less than 90%, then PMI is required for up to 11 years

FHA does allow PMI to be removed after 5 years provided appraisal figures reduce loan-to-value to under 80%.

[HappySaver]

by moving from 3.5% to 4.75%, your potential interest would increase by $41,000 over the life of the loan!

I agree with everything the other posters are saying, especially this ^^^. $41,000 extra interest, even if you subtract mortgage interest deductions, plus $$$ closing costs >>> $5500 MIP. It just doesn't make any mathematical sense to refi. Do NOT lose your 3.5% interest rate. It's a fabulous rate. And it's generally a terrible idea to restart the mortgage clock, especially since you'd be using it to pay for non-house acquisition debt. That's classic bubble-days behavior.

Lenders will say anything to get their commission. You need to run the numbers yourself.

Concentrate on paying down the cc debt, then save for the home improvements.

[MonkeyMama]

Concentrate on paying down the cc debt, then save for the home improvements.

Very much agreed.

It doesn't make any sense to increase the interest rate on $158k+ of debt. If you need to borrow additional money, then do so. But there is no way I would increase a 3.5% mortgage rate. The MIP is a short-term problem. Paying a higher interest rate on the entire mortgage just locks you in with significantly more interest for the long run. (Much more than your remaining MIP payments).

[feh]

I agree with everything the other posters are saying, especially this ^^^. $41,000 extra interest, even if you subtract mortgage interest deductions, plus $$$ closing costs >>> $5500 MIP. It just doesn't make any mathematical sense to refi.

+1

Refinancing to a higher interest rate makes absolutely no sense.

Other than that, pay off the CCs ASAP; the home remodeling should not be done until the CC debt is gone.

[snafu]

Good on you for sticking to your guns and refusing to refi your mortgage.

Like the others, I think you need to run the numbers. The Lending Tree salesman is seeking to transfer $$$ from your pocket to his by fees and commissions and you get a wa-aay higher interest rate. Please understand, mortgage amotorization tables add interest first and if your reset the mortgage you will pay nearly all interest and very little principal. Of $ 1127. subtract $ 155. MMI/PMI = $ 972. If you deduct property taxes and interest, how much is actually reducing your principal?

If your wife has already run up $ 15,000. in CC debt, I suggest you add up the interest you've already paid in 2014 and imagine yourself standing outside burning that sum... just because. I hope you follow Petunia's suggestion and seek to transfer as much of your CC debt to a 0% interest account as you can manage to payoff before expiry. Transferring CC balances to a 30 year mortgage isn't smart. You'll be paying so much interest on those items until 2044...

What home improvement are in the line-up?

I wonder if you would consider some of SA ideas on clearing debt to free up money to carry out the changes DW wants. We're here to cheer you on...