Should I refinance?

June 1, 2012 7:11 AM

Is a refi just to get rid of PMI worth it?

I bought a house in 2009 for about 120k and took out a mortgage for 117k. It's an FHA 30 year fixed with a 4% interest rate. I'm paying PMI of about $50 a month.

Shortly thereafter, the house was appraised at 170k by the city for tax purposes. Since then, I've made a ton of improvements, including finishing the basement and adding a new master bedroom and bath down there. I also completely gutted the kitchen. My uneducated guess judging by the neighborhood is that the value is probably close to 200k at this point, but I haven't had it appraised recently.

As far as I understand it, the only way to get out of PMI is to pay off 20% of the mortgage or refinance into a conventional mortgage. I qualify for a conventional mortgage at this point, but my rate wouldn't be much better. Maybe 3.8%? Is it worth it to get rid of the PMI? What about the closing costs?

I plan to be me in my house for another 2-5 years.

posted by murfed13 to Work & Money (13 answers total)

Are the amount of closing costs associated with the refi greater than what you'd be paying in PMI over the next 2-5 years?
posted by jerseygirl at 7:12 AM on June 1, 2012

Why would your rate be 3.8%? Mortgage rates are at all-time lows this week. I see 3.25% available where I live, with points back to cover closing costs.
posted by procrastination at 7:29 AM on June 1, 2012

Absolutely not!

You'll more than likely pay more in closing costs than the $50 in PMI. Typical closing costs would be around $3000, so the payback would be 60 months, 5 years. That's just to break even.

Also, what if your taxes go up due to all of your improvements, that there may wipe out your PMI savings.

You will reset your clock on your amoritization schedule as well, so while you may have just hit the point where a significant amount of your payments go to principle, you'll be back to paying mostly interest.

So, no. $50 is a mere bag of shells.
posted by Ruthless Bunny at 7:29 AM on June 1, 2012

Call your Mortgage company - the increased equity may be grounds to cancel the PMI outright, no need to refi anything. Here's an article on the topic. I'm not certain about a FHA loan, as the conditions for removing PMI are more strict than a conventional, so again, call your mortgage company.
posted by Slap*Happy at 7:40 AM on June 1, 2012

The amortization piece isn't actually a big deal since you can just keep making the same payment you're making now or adjust it slightly so you end up with the same term. You'd just have the option to go to the lower payment if you needed to.

You might want to look at some thing like a 7/1 ARM. That would get you closer to 3% and give you a couple of year's worth of cushion if you end up staying in the house longer than 5 years. That way, your overall payment should be more like $100 less per month so it would maybe make slightly more sense to re-finance but it depends heavily on what the final rate and closing costs end up being. A mortgage specialist at your mortgage company will be able to give you a MUCH better idea of how the numbers would play out than my quick and dirty calculations so you would want to call them.

My first step would be to see if you can get the PMI dropped without a re-fi. It might take a new appraisal which would cost $300-$500. I'd do that before messing with a re-fi, your PMI just isn't high enough and you're not planning on being in the home long enough for a re-fi to make sense.
posted by VTX at 7:48 AM on June 1, 2012

Given your situation, I recommend skipping a refi and spending a few hundred $ for a house assessment, and then getting your PMI removed because you can show proof your house is now of a value where you own 20% of it. I did that, and it worked just fine. The odd part of the process is that you can tell the assessor, who you hired, exactly the valuation you are looking for, and the assessor will try their darndest to value your house at that mark. It's kind of a shifty game, but one that leans in your favor.
posted by mcstayinskool at 7:49 AM on June 1, 2012

This calculator can help you determine whether it's worth it in the long run.
posted by JohnFredra at 7:49 AM on June 1, 2012

I believe that on an FHA loan, that you have to pay the 20% of the principle before they will remove it, it's different than conventional.
posted by Ruthless Bunny at 7:54 AM on June 1, 2012

Yeah, just ask the bank to reappraise the house. If they find that you've got enough equity due to improvements or whatever, they may just cancel PMI outright. Getting a new appraisal done is likely to be *far* cheaper than the closing costs on refinancing.
posted by valkyryn at 8:04 AM on June 1, 2012

Thanks for the advice everyone. Ruthless Bunny is correct -- you can't get PMI removed from an FHA unless you've actually paid 20% of the principle (which I haven't) or you've been paying it for 5 years. The current value of the house doesn't matter.
posted by murfed13 at 8:06 AM on June 1, 2012

Rates are really low now. You should be able to get a zero cost refi at 4% or better. The costs are actually rolled into the interest rate, but that is okay as long as the rate is no worse than you have now. If you get a zero cost refi, you pay nothing out of pocket except the cost of the appraisal and perhaps a $100 application fee that covers a credit check. You can make these cost back in less than a year if you save $50 a month. But first you need to verify that your appraisal will qualify for removal of PMI.

In other words, if you can get a zero cost loan at 4% or better that removes your PMI, then it is a no-brainer. It's free money and you should do it.

Also note that the PMI tax deduction is gone in 2012, although with your size mortgage you may be already taking the standard deduction anyway.
posted by JackFlash at 10:17 AM on June 1, 2012

Thanks for the advice everyone. Ruthless Bunny is correct -- you can't get PMI removed from an FHA unless you've actually paid 20% of the principle (which I haven't) or you've been paying it for 5 years. The current value of the house doesn't matter.

Careful -- it's not "OR", it's "AND".

"For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78 percent, provided the mortgagor has paid the annual premium for at least 5 years."

You cannot get out of FHA MI until 5 years have elapsed, full stop.
posted by zvs at 1:25 PM on June 1, 2012

Maybe I live in the wrong part of the country or something... but where are you seeing 0 cost refis? I've checked with big banks and some local credit unions and that's definitely not what I'm seeing.
posted by murfed13 at 1:03 PM on June 4, 2012