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Old 09-09-2011, 12:09 AM
 
181 posts, read 581,530 times
Reputation: 83

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I started to refinance my house. Mortgage company offered two options:

1. 4.625% no mortgage insurance

2. 4.25% with monthly mortgage insurance $163.37.

The loan amount can go 95% of current appraisal value which is 268k.

Which option should I take? Your expert's advice is highly appreciated!

Nate
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Old 09-09-2011, 12:30 AM
 
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1
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Old 09-09-2011, 02:42 AM
 
Location: Ohio
45 posts, read 81,813 times
Reputation: 22
I just did a 15 year at 3.22% with 50% down
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Old 09-09-2011, 09:05 AM
 
Location: Sonoran Desert
27,901 posts, read 37,916,030 times
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Here is how I see it:

What is enticing about 2 is that homes appreciate and when you get below 80% loan to value the PMI can go away. Now, I'm sure you realize that homes are in the dumper price-wise at the moment. There is a fairly good chance they will appreciate at at least historical rates if (and it is a big IF) the economy turns around. So you could be out of the PMI in maybe 5 years or less and have that in your pocket.

The main advantage in 1 is that interest is deductible and PMI is not. PMI is pretty much money down the toilet (so is interest I suppose). It is unlikely that you are going to be able to refi for less interest down the road if you house appreciates to the point where you have sufficient equity to not need a higher rate or PMI. So you are going to be stuck at the higher rate for as long as you own the house.

So question is: am I going to stay in this house a long time? If so, then 2 is better because you will get rid of the PMI eventually and have the lower rate. If you will be moving in less than roughly 5 years, then 1 is a better choice as you can deduct the higher interest from your taxes.
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Old 09-09-2011, 10:57 AM
 
Location: Cave Creek, AZ USA
1,766 posts, read 5,458,059 times
Reputation: 1058
The higher interest rate is paying for the PMI. You don't see it, but the bank is insuring their investment with it. Figure how long it will take you to get at least 20% equity in the house. That could be a long time. I put 20% down on my second house, which I still own, and I'm surprised the bank hasn't come back and told me I need to buy PMI now, given its lower value.
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Old 09-09-2011, 11:15 AM
 
240 posts, read 701,080 times
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So the loan amount is... 268,000 * 0.95 = 254,600 minus a down payment? 20% or 3% or ??? Some rough numbers not knowing all the facts at hand...

At 20% down, 254,600 - 20% down = 254,600 - 50,920 = 203,680 loan, so that amount at 4.625 for 30 years is roughly 1,047 monthly

At 3% down, 254,600 - 3% down = 254,600 - 7,638 = 246,962 loan, so that amount at 4.25 for 30 years is roughly 1,214 plus 163.37 for the time being is 1,377 monthly

More details please. And ask your mortgage broker to do this for you. S/he can give you a printout under each scenario for your specific situation.
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Old 09-09-2011, 01:21 PM
 
Location: Phoenix, AZ > Raleigh, NC
14,326 posts, read 17,545,228 times
Reputation: 22170
Quote:
Originally Posted by Ponderosa View Post
Here is how I see it:

What is enticing about 2 is that homes appreciate and when you get below 80% loan to value the PMI can go away. Now, I'm sure you realize that homes are in the dumper price-wise at the moment. There is a fairly good chance they will appreciate at at least historical rates if (and it is a big IF) the economy turns around. So you could be out of the PMI in maybe 5 years or less and have that in your pocket.

The main advantage in 1 is that interest is deductible and PMI is not. PMI is pretty much money down the toilet (so is interest I suppose). It is unlikely that you are going to be able to refi for less interest down the road if you house appreciates to the point where you have sufficient equity to not need a higher rate or PMI. So you are going to be stuck at the higher rate for as long as you own the house.

So question is: am I going to stay in this house a long time? If so, then 2 is better because you will get rid of the PMI eventually and have the lower rate. If you will be moving in less than roughly 5 years, then 1 is a better choice as you can deduct the higher interest from your taxes.
100% agree with what Ponderosa said. (Except that I never really hate when people put less than 20% down on a house.)
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