City-Data Forum Refinancing for higher rate to get rid of FHA MIP? (PMI, loan)
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06-27-2017, 04:00 PM
 2 posts, read 1,761 times Reputation: 10

Hi,

I currently hold FHA mortgage with 3.375% base rate and 0.8% MIP. The balance on the loan is approximately \$295k and the loan is ~1.5 years old and the MIP is 200\$/month. House value is ~335k. My broker suggests to put down \$25k and refinance for conventional loan to get rid of the , but the rate he is offering is significantly higher than 3.375% on my FHA - he is offering 4.25% with zero closing costs. According to him refinancing would reduce my payment by200\$/month => 2400/year and thus it is a 10% return on my 25k investment.

To me this makes little sense because if I add my current base rate and MIP I end up at 3.375+0.8=4.175 %, which is effectively same rate as what his is proposing with conventional. Therefore 200\$/month reduction in the payment is coming exclusively from reducing principal by 25k. Therefore the gain cannot possibly be more than 4.2%, which is my base rate. What am I missing?

Am I making sense? Does it make sense to refinance in this case.

Thanks!

06-27-2017, 06:25 PM
 Location: Bloomington IN 6,535 posts, read 7,793,687 times Reputation: 15955
I always calculate what the loan would cost me if pay it for the full life. You need to calculate how much interest you will pay over the full life of each loan and for the FHA loan add in the MIP costs over the life of the loan. Just based on the current loan value (this is not precise here) and no additional down payment (both calculated at \$295K)

174,500 +72000 (MIP)=total cost=246,000 (current loan)

227,400 = total cost at 4.25.

The question about whether to refinance goes beyond financials in my opinion. As yourself how long you plan to be in the house? Assume it's 5 years. What would your principle balance look like then in each scenario? Assume it's 10. What would the principle balance look like then?

Really not sure what gain you are referencing.

06-27-2017, 08:15 PM
 423 posts, read 303,290 times Reputation: 303
Quote:
 Originally Posted by burninsoul Hi, I need an advice. I currently hold FHA mortgage with 3.375% base rate and 0.8% MIP. The balance on the loan is approximately \$295k and the loan is ~1.5 years old and the MIP is 200\$/month. House value is ~335k. My broker suggests to put down \$25k and refinance for conventional loan to get rid of the , but the rate he is offering is significantly higher than 3.375% on my FHA - he is offering 4.25% with zero closing costs. According to him refinancing would reduce my payment by200\$/month => 2400/year and thus it is a 10% return on my 25k investment. To me this makes little sense because if I add my current base rate and MIP I end up at 3.375+0.8=4.175 %, which is effectively same rate as what his is proposing with conventional. Therefore 200\$/month reduction in the payment is coming exclusively from reducing principal by 25k. Therefore the gain cannot possibly be more than 4.2%, which is my base rate. What am I missing? Am I making sense? Does it make sense to refinance in this case. Thanks!
Keep the fha mortgage and ditch the broker.

06-27-2017, 08:28 PM
 6,755 posts, read 3,854,200 times Reputation: 15468
Is your broker getting a kickback from the mortgage co. for bring them business? Probably the deal is more for his advantage than your's. How long is each loan? How much principal would remain in each loan after 5 years? 10 years? Is his one of those interest only loans?

06-27-2017, 08:48 PM
 2 posts, read 1,761 times Reputation: 10
Assuming I keep the house for 5 years, I get:
Current loan: total paid interest 60k (including MIP) and principal balance of 265k
Refinance at 4.25% with 27k down: total paid interest of 56k and principal balance of 245k

But in the second case my minimum monthly payment will be 200\$ less than in the first one.
Then assuming that I keep paying the same amount and these 200\$ go into principal, will my balance be
245k - 60months*200\$/month=233k?

So after 5 years principle with 4.25% will be 32k lower. This should be compared to 27k that I have to put down. ROI of 5k over 5 years, which is ~3.7% annual.

Both loans are 30 year fixed rate. With the current loan, MIP stays for life of the loan.

Last edited by burninsoul; 06-27-2017 at 09:14 PM..

06-28-2017, 05:19 AM
 6,755 posts, read 3,854,200 times Reputation: 15468
I would stay with your current loan. The reason your principal balance would be 245K is ONLY due to the 27K down payment. And the mortgage co pockets 7K of it!

And the \$200 payment on the new loan would NOT all go to principal! Whenever you open a new loan, most of the payment for the first few years goes to interest. The longer you stay with a loan, the amount gong toward principal gradually increases. Keep your 27K and your present loan!!

06-28-2017, 08:02 AM
 569 posts, read 265,342 times Reputation: 662
But, isn't mortgage interest deductible on taxes vs the MIP? That combined with anything he saves in principal might put him ahead with second option assuming the cost to refinance is not too steep. It might be worthwhile to discuss with your financial planner/accountant if you have one to get their unbiased take on whether this refi would put you in a better position or worse.

06-28-2017, 08:43 AM
 6,755 posts, read 3,854,200 times Reputation: 15468
Quote:
 Originally Posted by luckeeesmom But, isn't mortgage interest deductible on taxes vs the MIP? That combined with anything he saves in principal might put him ahead with second option assuming the cost to refinance is not too steep. It might be worthwhile to discuss with your financial planner/accountant if you have one to get their unbiased take on whether this refi would put you in a better position or worse.

If he kept his 27K and earned interest on it he would come out ahead of any interest deduction, plus he wouldn't loose the 7K pocketed by the mortgage co. Remember, only 20K of the 27K applied to principle; the other 7K was taken by the mortgage co to keep (though this was obviously not spelled out to the OP since he was told there was "no loan initiation fee".

Last edited by Harpaint; 06-28-2017 at 09:00 AM..

06-28-2017, 09:13 AM
 Location: Back in the Mitten. Formerly NC 3,819 posts, read 5,200,893 times Reputation: 5259
Quote:
 Originally Posted by Harpaint If he kept his 27K and earned interest on it he would come out ahead of any interest deduction, plus he wouldn't loose the 7K pocketed by the mortgage co. Remember, only 20K of the 27K applied to principle; the other 7K was taken by the mortgage co to keep (though this was obviously not spelled out to the OP since he was told there was "no loan initiation fee".
Not necessarily. Some of the \$7K would be closing fees, but some would be escrow deposits. They would receive a refund from their current mortgage company, so that would really be a wash.

I have no idea what type of refi they are looking at or which lender, but some lenders do have a \$0 cost refi. Everything is lender paid except for the prepaid interest, the loan payoff, the escrow deposits, and any homeowner's insurance or property taxes that are due.

06-28-2017, 12:05 PM
 267 posts, read 148,082 times Reputation: 218
If the numbers are accurate and it really is a no cost loan what could you conservatively earn with a one-time investment of \$25k invested over the next 30 years versus \$200 per month over the next 30 years (assuming your MIP is for the life of the loan and the re-fi is for 30 years not 28.5 years)? To be accurate at the end of the original loan you would have 1.5 years of Mortgage + PMI payments to add in to get to the full 30 year comparison.

I would definitely get the actual monthly payment on the potential new loan. Very doubtful that it is an even \$200 per month.
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