Financing in Phoenix>Question Details

Tamara, Home Owner in Phoenix, AZ

Need advise...Thanks!

Asked by Tamara, Phoenix, AZ Thu Feb 21, 2013

I bought a 150K foreclosed house (2011) and owe 139K and valued now at 183K. I have a FHA 30 year fixed with a 780 credit score at 3.875% and my current PMI is $135 per month. With the increase in value, clearly I am lower than 80%. I called the bank to take off the PMI and they said because it was less than 5 years AND I am not 20% from the original loan amount (they said the mortgage would have to be at 118K) then they can't take off the PMI. Additionally I have paid in advance on my mortgage 6 months and at times double payments.

Question: Do I refinance under conventional for 30year or 15 year or do I stay in the current mortgage where I am at. I really hate paying $135 per month on PMI let alone interest. I can afford an increase in mortgage even if I go 15year. Even though my loan is 30 year, my plan is to pay it off in 10 years or less.

Any and all comments will help and I am looking for someone to assist that is experienced. Thanks so much :)

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Shane Milne’s answer
Tamara, thanks for the follow up information.

The amount of interest that is tax deductible on a mortgage is determined by how much interest you pay (as well as your tax bracket, and other factors). So assuming the same interest rate, if there is a 30-year mortgage and you are making payments that will pay it off in 10 years, it's the exact same amount of interest you'd pay on a 10-year mortgage and paying it off in 10 years.

You mentioned taking cash out to 80% of the value in order to pay off some credit card debt. While that may give you more of a tax write-off, you mentioned the credit cards are at 0%, so you are trading debt you are paying no interest on to something that you would be paying a small amount of interest on... so the amount of extra money you are paying in interest may offset the extra interest you'd potentially have as a write-off. Unless it drops you into a lower tax bracket, I don't see how paying $1 in interest will save you more than $1 on your taxes.

Now the $20k in credit card debt at 0% probably won't remain at 0% forever (I assume that is just some sort of introductory rate for 12 months, etc.) so if the interest rate on the credit card debt would increase to a level higher than the mortgage interest rate, then that could be of benefit because then you'd be paying the credit card debt off at a lower interest rate and it'd also potentially be tax deductible. However I'd caution against a 30-year mortgage AND making 30-year amortized payments on credit card debt, because you would be stretching the period of time it'd take to pay off that credit card debt thus increasing the total amount of money you'd pay out to become debt free (which I assume is your goal).

When it comes to renting the home out and determining what type of loan term to take, a 30-year loan term would allow to still make a 10-year payment and also allow you to make a lower payment if the need arises (such as if there are unexpected expenses one month, i.e. water heater breaks, and having a lower mortgage payment option would help you redirect funds to pay those expenses). However a 30-year fixed carries higher interest rates than a 10-year fixed, so you aren't going to save as much in interest with that longer term fixed loan.

Definitely various factors to consider.

Shane Milne | Lending in all 50 states | NMLS #81195
shane@thebesthomeloans | 949-273-4161 direct
1 vote Thank Flag Link Fri Feb 22, 2013
Hi Tamara,

I agree with all of the answers below. The ability to refinance and drop the PMI is more than enough reason to take advantage of the current mortgage rates and incur the cost to do so. Shortening the term is a preferred option when calculating the amount of savings compared to having a potentially higher rate on a longer term. The only consideration I would bring up is that with a shorter term you are LOCKED into that higher payment. Depending on your "season of life" as I like to call it, I suggest going with a longer term because you can continue to pay more, without penalty, to pay off a loan faster, but you have a smaller payment to fall bank on if something should happen (i.e. decrease in income or emergency).

Calculating payments using interest rates and amortization looks like a "U" shaped scale. Relatively speaking the lower rate you could have on a shorten term mortgage doesn't affect the interest payment as much as you would think if you compare it to the higher rate on a longer term. Apples to apples that is. So having a little higher rate on a longer term mortgage, but accelerating the pay off by paying more, is not a bad way to go either.

Matthew Remus
0 votes Thank Flag Link Fri Feb 22, 2013
Hi Tamara:

Since you evidentlyplan to live in the home for three years you will cover new closing costs. Get some quotes on all the options, closing costs and compare. If you do decide to live in the home a long time, you will pay much less interest over the course of the loan with the 15 year mortgage and no PMI.

Jeffrey Masich, Reatlor, GRI, MBA
HomeSmart Realty
0 votes Thank Flag Link Thu Feb 21, 2013
If your goal s to pay the house off early then refinancing to a 15 or 10 year mortgage may be your best bet, providing your income is stable and you are willing to take the risk of the higher payment.

The advantages of a 15 year mortgage are as follows:

Lower rate (in the high two's low threes depending on how you want to pay your closing costs)
Savings of 4800 in PMI payments that would pay for the refinance

I would be more than happy to walk through some calculations with you to see the best way to
reach your goal of true homeownership (Owning your home Free and Clear)

David Rider (NMLS 200787)
CMG Mortgage

See my website for legal information
Web Reference:
0 votes Thank Flag Link Thu Feb 21, 2013
Given the information you've supplied, I'd be inclined to lean towards a 15-year fixed conventional mortgage. The interest rate should be lower than what you are currently paying as well as you'd be able to ditch the monthly MI you are paying. The minimum required payment would increase of course, but if you are on track to pay it off in 10 years then you are paying more than the minimum required payment anyway. The savings in MI alone (3 years remaining at $135/mo = $4,860) would justify paying closing costs on the refinance, and with pretty much all lenders there is even an option to get a lender closing cost credit for a higher interest rate (i.e. if 3% didn't cost any points & didn't give you a lender credit, so you just had "normal closing costs", then a higher rate of 3.25% would give you a closing cost credit... those rates are just an example/aren't a "rate quote").

Shane Milne | Lending in all 50 states | NMLS #81195
shane@thebesthomeloans | 949-273-4161 direct
0 votes Thank Flag Link Thu Feb 21, 2013
Ok...Let me throw this out there. I am self employed and need tax deductions. I have about 20K in debt (Credit Card) at 0%. Taking additional money out on the difference to equate to exactly 20% (may be only 10K), and get the interest on this by and through interest on mortgage and be able to deduct the interest off on taxes, would I be better off with a 30 year and continue to pay double mortgage paying (6 out of 12 month) to get the deduction off on the taxes.
To clarify: Take a 30 year at what ever the interest is, take the PMI off for lower house payment (current pymt is 960.00 per month) as I will be renting this property out within 2 years (rental in this area is 1500pm) and purchasing a bigger home. Thus the payment is low, rent is higher than mortgage and taking the higher interest for tax deduction purpose? 4860pmi savings plus 500pm on rental seems noteworthy...

I just can't justify the PMI...thoughts?
Flag Thu Feb 21, 2013
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