Financing in 60030>Question Details

grayslakeres…, Home Owner in Grayslake, IL

Should I continue paying PMI, or would a loan to pay down to 80% and refinance make more sense?

Asked by grayslakeresident, Grayslake, IL Mon Dec 3, 2012

I purchased my home last year for $185k and have an FHA loan. Interest rate is 4.25% and owe $167k. I hate paying $151 each month for PMI that goes to absolutely nothing. Would I be better off taking out a loan to get down to 80% LTV to get rid of PMI? I figure that's about a $20k loan if my home is still worth $185k.

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grayslakeresident,
Contact some lenders direct and have them explain the pros and cons to what you are thinking. They may ask if you have the funds to cover the difference to eliminate the PMI and convert to a new non FHA Loan.
0 votes Thank Flag Link Tue Apr 16, 2013
It really depends on the cost of this 2nd loan. You would be looking at refinancing out of your current mortgage as well, since FHA loans require you pay PMI for at least 5 years even if you pay the LTV down to 80%.

Assuming an appraised value of $185k (although higher would be better), you'd refinance into a new loan of $148k. Depending on your credit score, you could expect the new mortgage to come in somewhere in the 3.5%-3.875% range if you went with a conventional 30 yr fixed mortgage. This would save you $325-$360 per month by lowering your rate, lowering your loan balance, and dropping the PMI.

The key in determining if this makes sense for you is finding out what terms you could get on this $20k loan to pay down the balance. It's not a mortgage, it's more of a personal loan. You wouldn't want to make the new loan any longer than 6-7 years since that is how long you would be paying the PMI for.

In my opinion, if you could borrow the money from a relative or friend in the 5% range then it would probably make sense. $20k for 7 years at 5% is $283/month so you would save $40-$80/month. However, if you were borrowing this money from a bank then they will most likely charge you 8-9% or higher. If that's the case then the savings could be entirely wiped out by the cost of that 2nd loan payment and you would just be robbing Peter to pay Paul.

So find out what you could expect to pay for that 2nd loan, then I can run a detailed analysis for you to see if it makes sense. You may also want to look into a 401k loan if you have the ability to do this. That way you'd be paying back yourself so it might make more sense.

Tony
0 votes Thank Flag Link Mon Apr 15, 2013
Hey Grayslake,
It's a tough call really, make sure you take into consideration the cost of the new loan, also, remeber that FHA loans have changed to where you are now stuck with PMI for the life of the loan! You financed last year so you are fine! Why not put that money towards paying down your principle? The new second loan will come with costs and a higher interest rate.
Be sure to factor in all of the costs, you might be better off putting the extra into your existing loan.
Jim
0 votes Thank Flag Link Mon Apr 15, 2013
Have a lender you trust run both scenarios and you can see how many months you need to break even in each and take the one that is sooner. That said you needed to put down $37k to hit 20% equity so be prepared to bring 10 grand to closing to save 150 bucks and that assumes the appraisal wont go down to 175. If plan on living there five years it doesnt make sense. the 3.5%ish rate now are for perfect borrowers and then prepare for the rate adders like condo loan, credit between 720-750 and that 3.5 rate becomes 4%. IMHO, the juice isnt worth the squeeze.
0 votes Thank Flag Link Sun Jan 20, 2013
Hi grayslakeresident, Sure, if that is what you prefer. Interest rates are so low right now, it may be beneficial considering you are tired of paying PMI
0 votes Thank Flag Link Sun Jan 20, 2013
How did this scenario work out for you?
0 votes Thank Flag Link Sat Jan 19, 2013
With the interest rates as low as they are right now I would definitely go see a lender. Paying PMI is like throwing money away! (If you didn't have your PMI payment that is roughly about $30,000 more you could afford in a home). Good luck.
0 votes Thank Flag Link Mon Dec 3, 2012
That makes perfect sense. Not only will you get rid of the mortgage insurance, but you'll also get lower your mortgage rate. You will get a new appraisal and be able to take out a loan for for 80% of the new appraised value to pay off your existing loan.

Give me a call to get started on the process.

Bradley Eggers
NMLS #: 222407
One Mortgage, Inc.
119 E Palatine Rd #200
Palatine, IL 60067
847-744-0168
beggers@ardain.com
0 votes Thank Flag Link Mon Dec 3, 2012
When you apply for a loan, the Lender is required to give you a GFE (good faith estimate):
It will show everything, be a guide for comparing Loans, and give you the info you need to see if you will be saving any money.

There are too many variables to answer intelligently. (and I don't feeling like showing my unintelligence.)
0 votes Thank Flag Link Mon Dec 3, 2012
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