Best refinance option

Question

Edit 8/13 3:30pm: Thank you everyone for the helpful advice so far. The lender behind Options A & B contacted me and lobbied for himself, saying there is a $1000 credit towards closing which legally can't appear on the GFE and TIL, but which will be reflected at close. So, cash-to-close numbers have been updated. Also - and this is important - the 15-year loans are conventional, NOT FHA. Sorry for the confusion - new FHA rules will not apply. Lender states I can simply call up customer service and drop PMI when my loan reaches 78% LTV.

I have a feeling the decision now will be more affected by how/quickly much we intend to prepay. For Options A & B, LTV is right now around 91.5% ($339000) and I need to get to 78% ($288,600). So, a little over $50k.

Lender also stated if I prepay more than $5k principal in a 12-month rolling period, I can recapitalize (or something). Any info here is appreciated. I wanted details in print but he was unable to provide them, saying it was simply a part of their "overlays". Does any of this sound familiar? I have asked him for details via Email - especially how this could benefit me.

All numbers below have been updated.

End Edit

Incumbent: do nothing. Pay the remaining 28.5 years of a 30-year FHA mortgage @ 3.75%, which has a current principal balance of $335,473.22:

Cash up front: (nothing)
Monthly payment: $2632.70
    Principal and interest: $1614.29
    Insurance: $81.17
    Tax: $453.38
    PMI: $353.86

Option A: refinance into a 15-year conventional mortgage @ 3.5%, borrowing $340,550:

Cash up front: $1713.60
Monthly payment: $3022.48
    Principal and interest: $2434.50
    Insurance: $87.50
    Tax: $375.00
    PMI: $175.95

Option B: refinance into a 15-year conventional mortgage @ 3.5%, borrowing $337,250:

Cash up front: $2462.49
Monthly payment: $2996.76
    Principal and interest: $2410.95
    Insurance: $111.56
    Tax: $375.00
    PMI: $174.25

Option C: refinance into a 15-year LPMI mortgage @ 3.63%, borrowing $337,250:

Cash up front: $5616.42
Monthly payment: $2843.26
    Principal and interest: $2431.70
    Insurance: $87.33
    Tax: $324.23
    PMI: N/A

Answer 1

Even with my comment, I see this as paying 1/8% more ($22/mo) to avoid PMI ($174) so yes, C is the winner.

The question is staying put is a complex one, more so than the A/B/C.

• Any non-mortgage debt at all?
• Is your emergency fund fully funded? (What ever than means to make you comfortable)
• Are you funding your retirement accounts?

There's value in liquidity. But, it appears your current PMI is so high, that this move to C is a small increase in payments per month ($210) compared to the normal P&I difference ($800). Had the math produced an $800/mo negative to your cash flow, I'd have offered an alternate answer.

EDIT - In response to OP's edit - for option B - the PMI is about 5/8% of the mortgage balance. The top $50K of the debt is what is triggering the PMI, So I look at this as if the "rate" on that $50K is an adder of 4.25%.

i.e. if you look at the $337K as having two parts - the main loan, $287K at 3.5%, and the $50K at 7.75%, the math will show this underestimates it by a wide factor - in fact, to match the total payment of $2584, with zero PMI, you'd need to assign a rate of 9.875% to that $50K.

The total payment is what it is, but when you view the $50K in this light, it emphasizes the true cost of that money, and may help you prioritize it differently in your debt repayment/savings decisions. e.g. For me it would take top priority right after my 401(k) matched deposits. I'd be paying off 10% debt before saving a dime beyond that. And when I saw a 2-3% credit card offer, if I were near the final year of killing this $50K, I'd grab 3% money to finish it off.

Recapitalize - This simply means that if you make a large payment, the bank will offer to recalculate your payments to stay on the same payoff timeframe. Start with $200K/30 yr loan, if you pay $20K today, you've just shortened the loan by almost 5 years because the same payment is due next month. Instead, the bank will offer to adjust the payment down by 10%, and the term remains 30 years. It's a good feature if you care about it.

Answer 2

EDIT: Originally, Options A and B were specified as FHA loans. Since they are actually conventional loans, my answer no longer applies. I'm leaving my answer in case someone else finds it useful for FHA loans.

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FHA rules regarding PMI changed last year. It looks like they require PMI to be paid for at least 11 years. Depending on the initial LTV%, it could be the life of the loan. This means that you will not be able to drop PMI when the LTV% hits 78%. Since you are refinancing an existing FHA mortgage, perhaps different rules will apply to you.

Based on this permanent/long-term PMI requirement, I would choose Option C.

Answer 3

With option B if the market does not move in either direction, you will be paying PMI until December 2016 when the loan balance goes under $296k (80% of the appraisal of $370k from that lender). 28 payments of PMI will set you back $4879.

The extra interest you would pay over 15 years with a rate of 3.63 instead of 3.5 is $3900, so even before discounting for taxes this is a better deal.

Answer 4

I'd offer a suggestion you may not have considered. It's not without it's risks, but something you should think about. What if you started paying extra on your current loan until your LTV was less than 80% and wait until then to refinance? If you hit it with a $4k payment each month and put in your $5500 you were going to use for down payment you would be there by the end of 2015 (not even assuming rise in value of the home). You'd then be in a position to get a loan with no PMI at all, and wouldn't risk being locked into it for any longer.

Like I said, this has it's risks: interest rates going up, liquidity concerns with putting so much extra into the payment (though you could stop the extra payments if someone lost a job - not an option if you actually raise the minimum payment), house values decreasing, etc. It could be the best option under certain circumstances though.