Should I refinance out of FHA to get rid of PMI?

Question

So I am at a crossroads right now and would like some feedback.  Currently, I rent a place out with a FHA mortgage t 3.75% owing $182k on the loan for a place I bought in 2011 for $205k.  I pay $2100/year in PMI and recently got the house appraised at $230k, which brings my LTV to 80%.  I live in Southern California and would like to buy something here, but my rental is appreciating and I'm not sure I want to sell just yet.

I was recently quoted 4.125% to refinance, but I would need to come out of pocket $10k plus closing costs ($4k).

Does this make sense to refinance to give myself the ability to buy FHA in CA with little money down, then sell when the time is right to pay down the principal?  or do I keep going?

Charlie Fitzgerald · Answer

your costs to refi are $14,000 plus the additional payment increase at the higher rate...that's 7 years of pmi payments and your payment goes down a net of about $119 a month.  So you are breakeven on costs in 9.8 years.  1.)  You are at roughly 79% ltv now with a 182k balance on a 230k valuation.  Your PMI can be removed when you are at or below 78%.  You can likely get there with your standard payments as is and another year of 3-5% appreciation, and do a streamline refinance at that point to remove the PMI.  That will cost you a heck of a lot less than $14000.

Craig Brouillette · Answer

I might be missing something without the whole story but my understanding is since your FHA loan predates 2013 when they made the MIP permanent your MIP should automatically cancel after 60 months and your LTV would have to be at 78% of the appraised value when you purchased it.  If it appraised for your purchase price then you would need to pay your balance down to 159.9k for the MIP to fall off.  Instead of paying closing costs to remove the MIP I'd rather you pay your principal balance down.

Mark P. · Answer

Thanks but what's your reasoning? I'm still paying $2100/year in PMI and I feel like I'm throwing money away.

Xavier Martin · Answer

Me too wanted to refinance my existing mortgage from a certified lender in Colorado but not sure whether it helps to get rid of PMI. My credit score too is comfortable, standing at 835 and I think I am eligible for a VA mortgage.

Jerry Padilla · Answer

@Mark P.

In my opinion...... There are a few things to consider here.

As @Russell Brazilmentioned if you are purchasing a new SFR, A low down payment conventional mortgage may be the best route to go.

@Alex M.mentioned getting a second FHA loan. If you relocate to a new area, greater than 100 miles from where the original FHA mortgaged property is located, you CAN qualify for a second FHA loan!

If you are thinking of purchasing a MFR a second FHA mortgage may be the best route to go for a low down payment option.

Cameron Tope · Answer

@Mark P.When I get in these predicaments I go back and review my goals. This should help you make the best decision.

Josh K. · Answer

Mark,

I was struggling with your last statement of being able to refinance out of MIP only after 60 mo and < 78% LTV based on $215k.  But that is what is used as the "last known value" (for FHA loans before June 2013).

Doing some more reading confirmed what everyone else here already knows (@Cameron Tope, why do I look elsewhere?) that the "last known value" is usually the value at the date of sale.  I am trying to talk my sister into house hacking using a FHA loan, but this requirement is an interesting wrinkle I'll have to bring up.  Thanks for opening a discussion around this topic!

I've heard it said time and again here - don't bet on appreciation.  It's a tough situation, but probably better to get into a situation where you have more control as opposed to being blown by winds you can't.  You can sense that with your last statement - anticipating any cap ex?

Mark P. · Answer

@Alex M.@Cameron Tope@Charlie Fitzgerald

So here's my situation...

My original FHA loan originated in Aug 2011 @ 3.75% - my total payment with P&I, PMI ($172/month), Taxes, and Insurance is $1,365/month.  The house was appraised initially at $215k and right now I owe $182k or 85% LTV.  I currently rent at $1,500/month which leaves me no room to accrue for any expenses unless I refinance, but it's not worth it.

My recent appraisal has me thinking about selling, but the neighborhood (Pennsport) is appreciating and I would like to ride it out, but my crystal ball is unclear at the moment.  My current loan states I need to pay PMI for 60 months or until Aug 2016, but I would still have to pay down the loan to 78% LTV of the $215k appraisal or $14k again.

Any advice on how I could get around it or does it make sense to sell soon?  (To avoid any larger issues which could occur)

Alex M. · Answer

Interesting post. You should first look into two things:

1. Does you mortgage pre-date permanent PMI rules for FHA? If not, then you can get it off, as others have mentioned, to reduce the payment without refinancing, and

2. Are you sure you cannot get another FHA loan? I was not under the impression that you could only have one at a time. I could totally be wrong, but I currently believe that if you are no longer living in the property and you want to get an FHA loan for a property to live in, you can. You should be able to get as many FHA loans as you want - assuming you follow the rules and live there for at least a year, and assuming you can provide a good explanation (other than being an investor) for why you are moving. If you are in a different state now, that sounds like a good reason.

Good luck. I'll be interested to see how this turns out and if you can get another loan.

p.s. I just refinanced a property to get out of a private loan and I the costs are painful, as is the new payment... but it freed up capital to re-invest. So I understand your interest.

Cameron Tope · Answer

@Mark P.I was in the same predicament last year. @Charlie Fitzgeraldis spot on. The closing costs aren't worth the $100/mo savings when you can streamline in a few years.

@Ivory HayesPMI doesn't fall off the loan. You have to wait until your loan balance reaches 78% of the original appraisal plus at least 2 years from the loan origination, or get a new appraisal to prove the current loan balance is less than 78% of the current property value. In either case, you have to be proactive to get the PMI removed.

Should I refinance out of FHA to get rid of PMI?

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