So I thought i'd call and see what it was all about and see if it would be in our best interest to lock into a better mortgage rate...
Our current mortgage is 5.25 % 30 year fixed FHA.
The offer was for 4.125% fixed for 30 years FHA style, with no appraisal needed or any fees because I'm in good standing with the Federal Housing Administration... Essentially they would just be redrafting the loan up and I'd only have to pay one fee... an upfront insurance amount for the FHA mortgage, about $1,700.00 according to the guy I spoke with. (my first upfront MIP payment was rolled into my current loan.)
If I took the offer, this would reduce my payment to $571.31 before MIP and Taxes. Right now my baseline payment is $650.64 so i'd be saving $79.33 a month, and it would take 22 months for SCB and I to see a profit from that.
Then I found out i'd get a partial credit for the original upfront insurance amount I had to pay for my first loan. One day one you loose 20% of the value paid in, then 2% each month you have the mortgage. Since I still have digital copies of my statement, I looked up how much I paid in: $2,026.50
- 20% of that is gone the first month
- and I've had the mortgage for 21 months (2% per month =42%)
So 62% of that amount is gone, and i'd get a refund for 38% of what I paid or $770.00. That makes the amount i'd be out of pocket for only $930.00 so i'd break even in a year... sounds pretty great right???
Wrong.
In the land of mortgage reform they changed the % amount that someone has to pay each month for MIP from 0.55% of the loan balance to 1.15% of the loan balance.
I only pay $51.97 a month right now... with the new loan that would jump to $105.57 a month... $53.60 MORE a month for no additional principle reductions, just more money down the drain. The larger MIP closes the gap to $25.73 in savings a month from the refinance and i'd be adding another 21 months to the length of my mortgage...
If that new law hadn't been in place, refinancing would be a smart move because it would only take us a year to break even with the costs... With the higher MIP its over 3 years and 1 month... and that's not a stellar deal.
If rates go down to 3.5%, even with the higher MIP i'd be saving $87.37 a month... but by the time that happens, any credit i'd have from the first loan would probably be long expired... so it would take about a year and a half to break even.
My best bet is to pay down my loan to 20% of its value and then look into refinance options so I can eliminate the MIP all together (its harder to eliminate then PMI) and hopefully when we get to that point interest rates will still be good.
When I had a fha loan (over a decade ago), when the loan to value ratio was 80%, we could refinance and get rid of the MIP. If the value of the condo has gone up, you may be able to refinance to a conventional loan without paying through 20% of your loan. Or you can call the people again and ask what would happen if your appraisal was at 80% LTV. Could they drop the insurance or do you have to pay through 20% of your loan first.
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