Refinance?

[ua_guy]

We're on a 30 year fixed 3.500% mortgage right now, but $577 of the $3575 monthly payment goes to PMI. We have 28.5 years left on the mortgage. PMI will fall off once LTV hits 80% which we've been on track to do in 5 years flat. Total PMI would end up being $35k paid over 5 years. Not ideal.

We're looking at a 15 year fixed 3.375% loan which will increase the payment to just over $4200/month and we should be able to drop PMI completely in the refinance. And, the most attractive part, we'd save almost $140k in interest over the life of the loan, representing a total of approx 22% of purchase price paid overall in interest. Lender rebate of -.60% towards closing.

On a low appraisal we'd expect a value between $630k-$650k for the home, however, the most recent comp just went for $724k. SO we are hopeful that we'll nail at least 78% LTV.

We would be at approx 21% gross income spent on PITI on the new 15 year term. Not unbearable, but it means we need to increase our EF. The downside is right now, if either one of us lost our jobs, we'd be able to afford the house on one income and not touch our EF. At the new payment, if I lost my job, we'd struggle and have to dip into our EF to cover the delta. If my s/o lost his job, we'd be okay, but it would definitely be tight(er).

Knowing we need to increase our cash reserves is a given...Any other drawbacks? Is this a slam-dunk provided we can get the house to appraise? Any other thoughts or advice?

[parafly]

If you can eliminate PMI with a refinance, then you should be able to eliminate it for your current mortgage as well. You'll need to work with your current lender and most likely get an appraisal.

A drop in interest from 3.5% to 3.375% is small and not worth the cost of refinancing in the vast majority of cases.

In my opinion, you would be better off keeping the flexibility that comes with your 30 year mortgage (smaller monthly payment obligation), get an appraisal to drop PMI, and make extra principal payments each month so the term of the mortgage and total interest paid are dropped significantly.

[HappySaver]

I agree with parafly.

There's a reason you chose a 30yr over a 15yr when you bought the house. Has your financial situation changed drastically since then?

Job security can change - it's certainly not worth the risk of potentially not being able to make a payment (plus the stress of having such a high monthly payment) for barely a drop in the rate.

Work to decrease your PMI. If you can do it through the lender with a new appraisal, great. If not, throw everything extra you can at the mortgage principal until PMI is gone.

In terms of the $140k savings over the life of the loan - don't compare apples (30yr mortgage with no extra payments) to oranges (15 year loan). Instead, take the extra amount by which your payment will increase with the new loan, and add that to your current monthly payment. The time it takes you to pay off the 30yr loan should drop to about 15 years and with minimal difference spent on interest, without the legal obligation of making extra payments.

[sblatner]

I agree with the others. Don't do a 15 year loan. That is a huge mortgage payment. Work with the lender to get rid of PMI or throw everything you can at the loan to reduce it so it can be removed.

Then, pay $4200 if you want towards the 30 year loan. You will have it paid off in no time with the flexibility to pay lower payments if you need to.

[ua_guy]

I should have noted -- the original loan is FHA. Refinancing to drop PMI is not an option with our lender. On the upside, we fall under the "old" FHA rules which do not dictate lifetime PMI.

So the net savings in refinancing is whatever PMI will cost us until we pay LTV down to 78% minus closing costs on a new loan, and whatever small difference in interest rate. 30 year rates are higher (best we've seen is 3.8-ish) compared to our current 3.5. So the lower rate on a 15 year also sans-PMI would be gravy. But yes, even though our jobs appear relatively stable, staring down a $4200/month mortgage definitely requires us to maintain a certain level of income. But is it any worse than our current $3500/month? In a catestrophic change of events, that would be almost just as difficult to survive.

[parafly]

I should have noted -- the original loan is FHA. Refinancing to drop PMI is not an option with our lender. On the upside, we fall under the "old" FHA rules which do not dictate lifetime PMI.

Well, that certainly changes things. If you are comfortable with the increased monthly payment of the 15 year refinance, then it's certainly worth exploring. However, I would only consider it if the appraisal comes through high enough and PMI is definitely dropped in the process.

How long are you obligated by contract (not LTV value) to pay PMI? Is it 5 years, and you are 2.5 years into it?

[ua_guy]

Well, that certainly changes things. If you are comfortable with the increased monthly payment of the 15 year refinance, then it's certainly worth exploring. However, I would only consider it if the appraisal comes through high enough and PMI is definitely dropped in the process.

How long are you obligated by contract (not LTV value) to pay PMI? Is it 5 years, and you are 2.5 years into it?

FHA cancels PMI at <78% LTV based on the original appraisal, or 5 years, under the old ruleset prior to 6/3/2013, which applies to our loan.

So, via extra payments that we're already making, it's a race to see if we can get to 78% in less than 5 years. We have 3.5 years remaining.

[corn18]

How much EF (and other accessible cash/investments) do you have? Is it enough to get you to 78% LTV on your current loan? Being house poor sucks. Paying PMI sucks almost as much.

[HappySaver]

If you end up refinancing, you should also check into the 20yr option.

[disneysteve]

If you end up refinancing, you should also check into the 20yr option.

Exactly what I was going to say.

All you ever hear about are 30-year and 15-year loans. Those are not the only options. You can get a 25-year or 20-year (or 10-year) loan also. One of the times we refinanced (I've lost track now) we went to a 20-year loan so that we wouldn't extend our repayment period. We couldn't swing the 15 but the 20 worked.

[snafu]

I'd like to see more information. What are other lenders offering? What action can you take to pay not only your mortgage obligation but a sum directly to principal to get out from under PMI? Paid $ 3,500. Feb. add $ 700. as direct payment to principal and see how it feel for February, March pay regular + $ 700. specifically instructed to principal. Can you cut other expenses to make it $ 1,000. direct to principal?

I suggest you run the numbers to see the saving by making additional payments directly to principal. I did that exercise which shocked me to my shoes back in the day of higher interest rates. It caused us to re-direct as much as possible, delaying other desires but oh so worth it to our bottom line