Refinance advice on FHA loan

[Michael Elder]

I purchased a home in the space coast area of Florida last Feb with an FHA loan at 2.75% interest rate. The value in that time has risen from 200k up to about 270k-300k. We are now trying to refinance out of the FHA loan in order to lower the payment. I've spoken with two lenders: the first had our payments going up about 100 because the interest rate increased. The second quote said they could refinance to where my payment would increase about $200 but they could pay off my car loan ($22k).

Is it unwise to be taking money out now? What verbiage do I need to use with a lender to get a lower payment w/o losing equity?

[Ian Wright]

Hi Michael, rates are certainly higher now compared to 2020-2021 so what you're hearing about rates is accurate.

I would ask the lender to show you side by side comparisons for the following scenarios so you can see the numbers:

1) Conventional "Rate-Term" (no cash out to remove PMI only)

2) Conventional "Cash Out" up to 80% LTV with 22k Cash Out

3) FHA Cash Out Refi up to 80% LTV depending if you have a lower credit score (say anything under 680-700), it may make sense to consider an FHA (but ONLY if there's a real financial need since you would unfortunately still have monthly PMI on FHA and the Upfront MIP regardless of the equity).

FYI, you need 20% equity / 80% Loan to Value on Cash Out so the Appraisal value will be key. For example, 300k value means your maximum Loan Amount = 240,000. Your equity position would likely worsen since they'll have to roll in all or some of the closing costs in most cases.

With that said, you're likely better off staying put right now unless there's a true need for the Cash Out. Also, depends how long you plan to keep the home & still live in it, if you have sufficient Reserves/savings etc (they should be asking you these things).

Debt Consolidation is a valid reason to pay off higher interest rate debt such as: credit cards, auto loans (depending on rate/payment), student loans, HELOC's etc. Or often someone will pull cash out to free up down payment funds for a future Rental property, 2nd home or simply add to their emergency funds, etc.

It's not unwise to take cash out right now to take advantage of rising home values, but I wouldn't do it just to do it. It has to make sense and should be tailored to your personal situation.

In your situation, you would taking a much higher interest rate on Conventional to remove the PMI; so the trade off may not be worth it.

It's possible, if we see recession like conditions rates could go back down somewhere between late 2022-2025 so you may get another opportunity to refinance then. 

Start by seeing the numbers and closing costs + Impounds and go from there. Make sure they show you this before ordering an Appraisal to avoid any cost. I think the benefit or lack thereof will be more clear then. 

Hope that helps. Thank you.