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I'm currently stuck in a 5.5% loan on balance 167.5k. PMI is roughly $75/mo. I am trying to refinance, but my lender tells me that even going down to ~4% rates, it wouldn't be worth it because my PMI will increase to make up most of the difference? Do this make sense and can anyone explain to me why this would be?

  • How close are you to making the 20% equity cut-off that will eliminate PMI completely? If you can pitch in a cash payment to bump you past that point, or at least to reduce the time over which you'll be paying for PMI then you might still make bank. (Alternatively you might take the new line and force yourself to pay more than your minimums ... until you cross the 20% equity mark). – Jim Dennis Dec 30 '11 at 3:44
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Is that an FHA loan you have? And you're wanting to do one of those low cost FHA re-fi's, right?

The answer is that in between when you first got that loan and now, the government's changed the rules on PMI for FHA loans. It more than doubled the amount of monthly PMI you have to pay.

The new rates, efective April 18th, 2011, as as follows:

15-year loan term, loan-to-value > 90% : 0.50% per year
15-year loan term, loan-to-value <= 90% : 0.25% per year
30-year loan term, loan-to-value > 95% : 1.15% per year
30-year loan term, loan-to-value <= 95% : 1.10% per year

It used to be 0.50% per year for the 30 year.

So that's why the PMI would go up.

There is another rule in play too, specific to that no-cost FHA refi -- the government requires that the combined (principal+interest+pmi) monthly payment after the refi is at least 4% lower than the current payment. Note that the no-cost refi does not require a new appraisal.

Some options present themselves, but only if you can show some equity in a appraisal:
1) if an appraisal shows at least 10% equity, you can go refi to a standard mortgage. You might even be able to find one that doesn't require PMI at that level. If you have 20% equity, you're golden -- no pmi.
2) See what the monthly payment will be if you refi to the 15 year FHA mortgage. Between the much lower PMI, and the much lower interest rates (15 year is usually about 0.75% less than a 30 year), it might not be much more than what you're paying now. And you'd save a huge amount of money over time, and get out from that PMI much earlier (it stops when your principal drops below 80% of the loan amount). This would require that reappraisal.

  • +1 very nice response. Given the highest PMI rate is 1.15%, and of course, it doesn't last for the whole loan duration, for the lender to suggest the refi down by 1.5% is not a money saver does not make sense. His current PMI is about .5%. A .65% increase can't fully negate a 1.5% savings on the rate. – JTP - Apologise to Monica Dec 30 '11 at 4:25
  • @JoeTaxpayer plugging his figures in a mortgage calculator: current principal, interest and pmi monthly payment is $1020. A refi to 4% with that 1.15% pmi would be $960, a 5.8% payment reduction. At 4.25% interest, monthly payment would be $984, a 3.5% payment reduction. So, he'd have to be able to get an interest rate well below 4.25% to qualify for an FHA no-cost refi (because of the minimum 4% payment reduction requirement). Even with today's low rates, he'd have to have really good credit. – Patches Dec 30 '11 at 10:31
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    Ok so the numbers turn out it'd be about a ~$75/mo savings with this increase in PMI, you hit the nail on the head. Closing fees would be somewhere in the 2k-3k range. Not sure what the house would appraise for but the purchase price was $172k, so probably somewhere around there. Guess in this case it doesn't make sense if I plan to sell in the next several years (which I do)....disappointing. – GBa Dec 30 '11 at 15:21
  • @WillDen yea, totally not worth it. – Patches Dec 31 '11 at 0:00
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The PMI rate is calculated at the time your mortgage is underwritten to be terminated at the point where you have 20% equity in your home. It is calculated based off of default risks based on your current equity value at the time of the loan. So if you got your mortgage before the banking crisis those risk charts have changed dramatically and not in your favor.

So lets say you have a 100k home which you put 10k down so you have a mortgage of 90k. Since you have accumulated an additional 5k equity so payoff value is now 85k. If you refinance your mortgage and the home values in your area have dropped 15% you now are borrowing 100% of the value of your home. So you have higher risk from being at 100% as opposed to 90%. And the PMI is for the 20% of equity you do not have that the bank can not expect to recover. So when you originally bought the house your PMI pay out was 10k. At 85K value and 100% borrowed the PMI payout will be closer to 18k. While you may still be able to sell your home for the original value when they do the refinance calculations they use what your area has trended. If that is the case you maybe be able get an actual appraisal to use but that will come out of your pocket.

*Disclaimer: These are simplifications of how the whole complex process works if you call the banker they can explain exactly why, show you the numbers, and help you understand your specific circumstances. *

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There are deals out there which allow refinancing up to 125% of appraised value so long as you have a solid payment history. You need to research banks in your area working with HARP funded mortgages.

An alternate method is to find a bank that will finance 80% of the current value at 4% and the rest as a HELOC. The rate will be higher on the equity line, but the average rate will be better and you can pay the line off faster.

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    This doesn't even come close to addressing the specific question that was asked. Seriously! – Jim Dennis Dec 30 '11 at 3:41
  • When a lender offers an answer like his did, that they won't help him when rates are 1.5% lower than he has, I could either try to explain how/why the lender wants to screw him, or I can suggest an alternate solution. If you don't think my answer had value, vote it down. If really bad, vote to close. Chad offered an excellent overview of how PMI works, silly for me to repeat it. – JTP - Apologise to Monica Dec 30 '11 at 4:13
  • A comment such as: "talk to better lenders" would have made more sense. Suggesting HELOCs to someone without any understanding of their financial situation nor their objectives is a bad idea. Doing so with only the knowledge that they are paying PMI (and thus have less than 20% equity) also strikes me as ill-advised. (I don't yet have the rep. to vote your answer down). – Jim Dennis Dec 30 '11 at 4:18
  • When one has more than an 80% loan, it's not uncommon to break it into an 80% conventional with a HELOC for the rest. It's not the only solution of course, but the right rates for each can make it a good one. The nature of these questions is that we frequently don't have as much info as we'd like. The questions with the most details often get far better answers. In this case, I agree that knowing the current home value would help. – JTP - Apologise to Monica Dec 30 '11 at 4:48
  • Do you have the name of a bank that does the 80%+heloc anymore? I could really use something like that. – Patches Dec 30 '11 at 10:37

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