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Old 02-16-2012, 03:58 PM
 
356 posts, read 544,529 times
Reputation: 114

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Existing loan:

My loan is just about 2 years old. I have a 5/1 FHA ARM, current rate is 3.5%, with a maximum rate of 8.5%. I put down the minimum down payment, so I paid up-front MIP as part of the closing process. I was able to take advantage of the $8,000 federal tax credit.[/SIZE]

Breakdown:

Remaining principle: $156,000
Current Monthly Principle: $269
Current Monthly Interest: $454
Currently Monthly Escrow: $359 (taxes are high!)
Monthly Payment: $1082 (includes $70 monthly MIP)

Background:

I am self-employed / single s-corporation owner. When I took out the loan, I didn't have much capital available because I was heavily invested in my business. Two years later, things have changed. For the last two years, business has grown, and I have been able to max out my individual 401k in both salary deferral and profit sharing/company match.

Due to the fact that I have been able to grow my business and capital position, as well as the fact that I will not be able to deduct MIP in 2011, I'm considering refinancing to a conventional loan with 20% down to avoid PMI. If I sell the house in 5-7 years, is it worth looking into refinancing? My father thinks I should stick with the current loan and continue to invest the money in my business.

What do the experts think? Is it worth my time to investigate, or should I just stick with the current FHA loan and (hopefully) get rid of the monthly MIP after I hit the 5 year mark? Thanks for reading!
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Old 02-16-2012, 04:17 PM
 
2,133 posts, read 2,057,074 times
Reputation: 1482
I think your father is correct.

Me thinks that if your business is doing good to the extent that you are now able to put down 20%, I don't see why you want to refinance out of 3.5% rather than growing your company. The best rate you could get may be around 3.5% after putting 20% down (or let's say tying 20%) and still pay closing costs.

Keep the 20% accessible in case you need to refinance and ride this out. Your real calculation is really between 840/year MIP versus the closing cost even if you have 20% that you can throw in without a problem.

Bottom line I wouldn't refinance in your case.
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Old 02-17-2012, 11:59 AM
 
356 posts, read 544,529 times
Reputation: 114
Thank you for the reply. When you say the best rate I could get would be 3.5%, are you basing that on a 30 year fixed? What if I went with another 5/1 ARM? Also, wouldn't I be eligible to receive a partial refund on the up-front and monthly MIP fees that I've been paying for the last 2 years?
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Old 02-17-2012, 12:05 PM
 
3,428 posts, read 3,713,247 times
Reputation: 1344
Quote:
Originally Posted by mckeesport_alum View Post
Thank you for the reply. When you say the best rate I could get would be 3.5%, are you basing that on a 30 year fixed? What if I went with another 5/1 ARM? Also, wouldn't I be eligible to receive a partial refund on the up-front and monthly MIP fees that I've been paying for the last 2 years?
I believe you do get a refund on the MIP fees to apply to a new FHA loan. If you refinance to a non FHA loan, than there is no refund.

However, remember (and I think it was recently in the past 1-2 years), mortgage insurance premiums have increased. So the MIP may be even higher than what you are paying for.
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Old 02-17-2012, 12:12 PM
 
3,428 posts, read 3,713,247 times
Reputation: 1344
Quote:
Originally Posted by mckeesport_alum View Post
Existing loan:

My loan is just about 2 years old. I have a 5/1 FHA ARM, current rate is 3.5%, with a maximum rate of 8.5%. I put down the minimum down payment, so I paid up-front MIP as part of the closing process. I was able to take advantage of the $8,000 federal tax credit.[/SIZE]

Breakdown:

Remaining principle: $156,000
Current Monthly Principle: $269
Current Monthly Interest: $454
Currently Monthly Escrow: $359 (taxes are high!)
Monthly Payment: $1082 (includes $70 monthly MIP)

Background:

I am self-employed / single s-corporation owner. When I took out the loan, I didn't have much capital available because I was heavily invested in my business. Two years later, things have changed. For the last two years, business has grown, and I have been able to max out my individual 401k in both salary deferral and profit sharing/company match.

Due to the fact that I have been able to grow my business and capital position, as well as the fact that I will not be able to deduct MIP in 2011, I'm considering refinancing to a conventional loan with 20% down to avoid PMI. If I sell the house in 5-7 years, is it worth looking into refinancing? My father thinks I should stick with the current loan and continue to invest the money in my business.

What do the experts think? Is it worth my time to investigate, or should I just stick with the current FHA loan and (hopefully) get rid of the monthly MIP after I hit the 5 year mark? Thanks for reading!
I believe in order for you to get rid of MIP, two things need to happen
1. You pay MIP for 5 years

AND

2. The loan to value ratio must be less than 78%. So considering home prices in many parts of the country have DECREASED in the past 2 years and home prices aren't expected to increase for the foreseeable future, (unless you pay extra into the principal). It's very unlikely for you to reach this 78% loan to value ratio in 5 years.

With ARMs it's always a game. If you are financially savvy and have the means to withstand the potential 5% rate increase in 3 years, or can sell anything or can afford to refinance to a management rate. If those things fit your description, than stick with your current 3.5% rate for the next 2-3 years and wait and see.

That being say, you must remember (and ARMS are usually based on 1 year treasury rates or 1 year Libor). When the feds and the rest of the world starts raising rates (by 2014), you may need to consider your options about refinancing at that time.
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Old 02-17-2012, 12:52 PM
 
2,133 posts, read 2,057,074 times
Reputation: 1482
Quote:
Originally Posted by mckeesport_alum View Post
Thank you for the reply. When you say the best rate I could get would be 3.5%, are you basing that on a 30 year fixed? What if I went with another 5/1 ARM? Also, wouldn't I be eligible to receive a partial refund on the up-front and monthly MIP fees that I've been paying for the last 2 years?
Yes, my assumption was for fixed 30yr. You could also have 15yr. I think the partial refund is if you go to another FHA and that is not the option you are looking. When you can put 20% down, why would you go to another FHA route. So, let's take that out of the way.

Another 5/1 ARM? you could but you have to really look at all the options and what exactly you are trying you are trying to achieve. You already have and ARM, so taking another ARM should be compared against fixed ones. Given where the rate are NOW, I wouldn't go that route. But you can crunch the number. But you are already in an ARM.

To the other poster. Rates doesn't just go 8% (with max increase 5% in the OP case) at the snap of a finger. The OP can and will see them and he has a 20% ready to finance and get out of the ARM, if he wants. ARMs are exactly for people like him. Of course, this assumes house value doesn't fall off the cliff in the area, which I think is the likely scenario.

Again, like I said if I were you, I would sit tight for a year or two and then analyse my situation.
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Old 02-17-2012, 01:10 PM
 
3,428 posts, read 3,713,247 times
Reputation: 1344
Quote:
Originally Posted by MeInDenudinFL View Post
To the other poster. Rates doesn't just go 8% (with max increase 5% in the OP case) at the snap of a finger. The OP can and will see them and he has a 20% ready to finance and get out of the ARM, if he wants. ARMs are exactly for people like him. Of course, this assumes house value doesn't fall off the cliff in the area, which I think is the likely scenario.

Again, like I said if I were you, I would sit tight for a year or two and then analyse my situation.

Of course it doesn't jump to 8% right away. But the Feds can raise the rates very fast. Just look at a 2- 2.5 year period. Feds raised the rates from 1% to 5.25%. What happened to all those people with 1, 3, 5 year ARMs that expired during those time? Because they were hit going from say 5% 3 year ARM in 2007 to facing close to a 10% interest rate when the ARM reset in 2007.

You are right, ARMs are for very financially savvy (and financially secure) people.

I would sit tight for the next 1-2 also. But when or if the Feds starts announcing interest rates going up sometime in 2014? or whenever they feel economy is stable, there will be a massive demand in refinancing for people who took out ARMs.
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Old 02-17-2012, 01:12 PM
 
356 posts, read 544,529 times
Reputation: 114
Thanks again to everyone for the replies. I'm in western PA and in a neighborhood where I don't see the values falling. That being said, the taxes are pretty rough and may increase. There is also a proposal to create a NID (Neighborhood Improvement District). My guess is it will pass, so I'm not sure what will happen in the next 3-5 years. However, my feeling is that if the home values fall in my neighborhood, they will fall even more in surrounding neighborhoods.

I'll just keep on doing my thing and see where I am in 3 years. :-).

Last edited by mckeesport_alum; 02-17-2012 at 01:26 PM..
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Old 02-17-2012, 02:58 PM
 
356 posts, read 544,529 times
Reputation: 114
Also wanted to give details on how my 5/1 ARM works for those who are curious. The initial rate is fixed at 3.5% for the first 5 years. After year 5, the rate can increase up to 1% per year, and maxes out at 8.5%. So the worst case scenario for me would be:

Years 1-5: 3.5%
Year 6: 4.5%
etc., etc.
Years 10-30: 8.5%
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