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I am looking into doing a streamline refi on my 211,000 FHA loan with interest rate of 5.5%, 30 yr fixed. I've had this loan for 2 years. I can get a 4.25% rate, 30 yr fixed. My concern is that my MIP payment jumps from $86 to $193, so although my monthly payment will drop, my interest payments which are tax deductible will also drop. My sister thinks that this offsets the proposed savings per month ( from a tax savings perspective as I am in the 28% bracket). I believe this is true if PMI will no longer be tax deductible next year? I am a bit confused. I plan to stay here for at least 5 years.

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A savings of the 1.25% is about $2600 the first year. $1900 after taxes. Your PMI jumps $1284. You are still ahead, but would see a bigger gain when you can eliminate the PMI, obviously. As litteadv suggests, do the math. (Mine was not exhaustive), the savings will drop a bit each year as you pay more in principal, but it's close enough for the first few years.

You didn't mention - what is your loan to value ratio? You should be able to look at an amortization schedule and see when exactly, you'll hit 80% and drop the PMI.

Looking at a PMI calculator which may be outdated, it shows that you appear to be holding less than 5% equity, the rate you're quoting for PMI is for the 95-97% LTV amount. For what it's worth, if you start at 95%, it takes until about month 100 (a few months into year 8) to pay down to an 80% LTV)

  • Your computation is almost exactly as mine so that is reassuring. Now, I just need to make sure that my refi is indeed a no-cost refi, as promised by the banker. Any tips on what to look out for? Thanks a lot! – Chie Nov 3 '11 at 7:01
  • Just ask. The bank needs to be upfront on all costs involved. If they say 'zero', they should put 'zero' in writing. – JoeTaxpayer Nov 3 '11 at 12:48
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You need to keep in mind that eventually (hopefully soon) you'll get rid of the PMI payment once you've gained 20% equity in your home.

But when that happens, in a couple of years from now, the rates might go back up. So if you refinance now - you'll gave much lower payment then, than if you don't.

So you need to think for how long are you going to keep the house, and how likely it is for you to get rid of the MIP any time soon, and with that redo your calculation.

Re the taxes... You don't get free money in your tax refund. Your mortgage interest is tax deductible, but the refund you get will always be less than the actual interest you pay. So the only cost for you right now is the additional cost of the PMI (I'm guessing that's why the difference, right? You're forced to move from FHA MIP to PMI) and whatever closing costs you have, vs much lower monthly payment for the lifetime of your loan.

Now do the math.

  • I'm rereading the line "the refund you get will always be less than the actual interest you pay" and trying to understand the implication. To fully analyze the situation, one still needs to adjust the interest for taxes. (assuming one is already itemizing to keep the math easier) A drop of 1% on the rate is really a savings of .72% in the OP's bracket. The sister is correct to tell OP he needs to adjust his savings by this factor when looking at the total cost and savings for the refi. It's possible if the mortgage balance were lower that the savings don't cover the extra PMI. – JoeTaxpayer Nov 2 '11 at 15:04

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