Should we refinance to drop PMI payments?
April 7, 2016 1:49 PM   Subscribe

Should we refinance our (relatively) freshly bought home?

We bought our first home just under a year ago. We had just over 10% down, and thus, have PMI payments we make. We live in Portland, Oregon, where the housing market is going rather bananas. Our neighborhood was/is one of the last bastions of cheaper housing, but things are steadily rapidly creeping up.

My wife and I are pretty aware that the house has increased in value (and we've done some yard improvements too), but we were kind of shocked when we found out by how much it could have increased. In the past month, two houses within a quarter mile of us that were really similar to ours, on similar lots, in similar condition sold for 25% and 30% more than we paid for our house. This actual sale value outstrips most of the online-home-value calculators for our area by quite a bit.

If our house got reappraised to the level of either of those two houses, we'd be well over the typical 20-22% required equity needed to drop PMI payments. We were told when we were issued the original loan, that the PMI is calculated off that original loan and valuation of the house, not any equity increases we would see from the property becoming more valuable. It doesn't appear that we can just pay for a new appraisal and have the mortgage company drop the PMI for us.

Should we consider refinancing the house? We're so early into our mortgage its looking like dropping the PMI payment now would be a net benefit, even in the face of any refinancing costs? Our credit union offers pretty cheap refinancing rates from what we've explored in passing...but I'm trying to gauge if this is even worth our time and effort.

Guidance would be much appreciated. I won't threadsit, but I'm aware that there might be some important details that I've left out or not considered; I'll try to fill in the gaps if this is too murky.

Bonus points: We're currently working on covering our patio, and laying down a new deck (we have plans and permits, no construction happening yet). If refinancing is the right path to take, would it be substantially better to wait and pursue refinancing until after that project is completed? ROI makes my head spin a little bit, and I'm not sure how it would or wouldn't play into this whole topic.
posted by furnace.heart to Work & Money (9 answers total) 4 users marked this as a favorite
The house appraisal isn't really that expensive - like $400, right? Do that first and then do the numbers around the PMI. Your lender can help with the numbers of how long you'd take to break even, and if you can qualify for a lower rate as well. The details change week to week, so it can't hurt to get started now.

We started a refinance process fairly soon into our mortgage but worked out that it would take like 4 years to break even. We waited a few more months and the interest rates went down further and we broke even in something like 10 months.
posted by vunder at 1:59 PM on April 7, 2016 [2 favorites]

Oh and I'm not sure an external patio project is going to make much difference in the appraisal. Would be different if you were adding a bathroom or something.
posted by vunder at 2:00 PM on April 7, 2016 [1 favorite]

Did you like your mortgage lender? Call her and ask what she thinks. A few years ago, we did exactly what you're suggesting. Since the lender had our old file all we did was send her our last two paystubs and a new tax return. We had an appraisal and then the refi was super quick and easy.

I wouldn't wait until you do projects. Things like patio upgrades and landscape don't meaningfully influence your appraised value unless your house is far below its comps. (If your yard was full of cars on blocks and the comp houses all had perfect landscaping, that would make a change to the appraisal.)
posted by 26.2 at 2:02 PM on April 7, 2016 [2 favorites]

Is this FHA, VA, or private PMI?

We bought our first home just under a year ago.

If it's private PMI, you may be able to remove PMI for just the cost of another appraisal after two years of on-time payments. So if the cost of refinancing (adjusting for the effects of the changed interest rate as well) is higher than the cost of paying for the ~13 months of PMI, then it's not worth it, assuming your lender is willing. Here's another guide that discusses it with the assumption that you're using increased home value rather than prepayment to do the request.

What is the current interest rate and do you have an estimate for what the CU would offer you now? They've risen slightly since a year ago, so that alone might be enough to remove the benefit of ditching the PMI.
posted by Candleman at 2:04 PM on April 7, 2016 [2 favorites]

I could have sworn that we had to wait three (or maybe two?) years before we could attempt to eliminate PMI but once we did, it was easy to complete. Also, the mortgage people required that they do their own appraisal and couldn't use one that we did independently.
posted by otherwordlyglow at 2:08 PM on April 7, 2016 [1 favorite]

Another possibility to explore that may be less expensive than a refi: taking out a home equity loan and using it to pay down your mortgage to below PMI required levels.
posted by metasarah at 2:41 PM on April 7, 2016

Are there any penalties for early termination of your existing financing/mortgage?

A discussion with your financier, with the subtext that 'play ball or we go elsewhere', may be in order, but only if you know what it is possible/financially viable. Start with your current financial documentation and find out what manoeuvring room you have, and what the costs might be.
posted by GeeEmm at 7:14 PM on April 7, 2016

Based on what you've said, yes, I think it does make sense, especially because you are so early in your mortgage. PMI is lost money, you are only protecting your lender by paying it. No equity is gained. PMI is not even tax-deductible if your AGI is over a certain threshold.

We refinanced our first home within about 1 year of owning it. We did the same with our second home as well. It is definitely worth it IMO. In the first case, I was able to roll in my closing costs into the new mortgage as well, so I did not have any out-of-pocket costs. It made sense for me at that time based on my cash flow and the interest rate we were getting (it was lower), but this of course means you are going to pay more interest. There is a duration where your refinance costs (whether you pay out of pocket or roll into new mortgage) will break-even with costs of your existing mortgage. I suggest doing the math and making sure you will hold on to the house until at least that point. Mine was around 13 months if I remember correctly, and we were definitely going to hold on to the house for way more than that, so it was a no-brainer for us.

Some online calculators: Zillow Bankrate

As otherwordlyglow said above, the new lender will require that they get a new appraisal (and charge you for it) even if you got your own now, so I would not waste money getting one on your own if you have a fair confidence that the comps you mentioned are valid. Instead, check with your realtor.... they should be able to give you a free CMA valuation for your house.

Btw, if you decide to refinance, I suggest shopping around beyond just your credit union. Check with your current lender. You may get better rates with a mortgage broker (that was my experience), but I suggest only a local broker so ask your friends for a reference. Also check rates at reliable out of state credit unions such as PenFed (no need to be military to join).

P.S. I am not sure if you explored getting a 80-10-10 mortgage (80% first mtg, 10% 2nd mtg and 10% down) when you bought the house. The 2nd mortgage usually is at a higher rate, but if you had plans to pay that off relatively quickly, this could've been an option to consider because you don't pay any PMI with this approach. And now with the appreciation, you could've just rolled in the 2nd mtg into a new refinanced mortgage ("no cash out" refinance it is called). You would need to go through an experienced mortgage broker to get this kind of setup because typical banks and credit unions don't do this.
posted by thewildgreen at 9:29 PM on April 7, 2016 [1 favorite]

When running the calculus as to whether it makes sense to refinance, please investigate whether Oregon is a recourse or non-recourse state for purchase money home loans.

In California, for example, purchase money home loans are non-recourse, which means that if real estate values were to plummet, and it no longer made sense to pay your mortgage, you could walk away from the mortgage without getting sued by your lender for the balance due on the mortgage. This is a substantial benefit to houses purchased at the top of the bubble. But it only applies to the original purchase money loans.

However, this limitation does not apply to refinances, or second mortgages*, which are all recourse loans. As such, the lender could then take the amount of money you owe, even in excess of the actual value, and hold you responsible. [Sometimes you can short sell, but we're getting a little far afield at this point.]

(*thewildgreen mentions a Purchase Money loan of 80-10-10, where there is a second mortgage for 10%. Mortgage companys fight like hell to say these are recourse, while common sense says they are purchase money. In my experience, money gets paid.)

posted by China Grover at 9:10 AM on April 8, 2016 [1 favorite]

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