Why would this FHA refinance cause my mortgage insurance payment to increase so much?

Question

I have a 30-year fixed loan at 5.25%, of which I still owe $184,000. Current payment is $1463/month including PMI, escrow, taxes, etc... and I've been in this loan for 2 1/2 years. Current appraised value of the home is $210,000.

Quicken Loans is offering me a "free" FHA refinance to 30-year fixed at 4.00% The paperwork they sent me looks like this:

R,,,,,,,,,,,,,,,,,, Payment Comparison ,,,,,,,,,,,,,,,,,,,T
          .  Description                       Proposed    Present  .
          . ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, .
          .  First Mortgage P&I or Rent         $879.37  $1,060.45  .
          .  Other Financing P&I                  $0.00      $0.00  .
          .  Homeowner's Insurance               $32.83     $32.83  .
          .  Real Estate Taxes                  $283.78    $283.78  .
          .  Mortgage Insurance                 $179.57     $86.16  .
          .  Homeowner Association Dues           $0.00      $0.00  .
          .  Other Escrows                        $0.00      $0.00  .
          .  Leasehold fees                       $0.00      $0.00  .
          .  Debt Paying Off                      $0.00      $0.00  .
          .                                    --------   --------  .
          .Housing Payment Excluding Debt     $1,375.55  $1,463.22  .
          .Present Housing Payment Including Debt        $1,463.22  .
          .                                                         .
          .Total Payment Decreasing w/Paying off Debt       $87.67  .
          .Housing Payment Decreasing  $87.67    Pmt Shock 94.01%   .
          F,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,G

R,,,,,,,,,,,,,,,,,,,,,,,,,,, Details of Transaction ,,,,,,,,,,,,,,,,,,,,,,,,,,,T
.Payoff of Mortgage(s)           $184,277.00                                   .
.Payoff of Other Debt(s)               $0.00                                   .
.Property Taxes Owed                   $0.00                                   .
.Adjusted Origination Charges          $0.00                                   .
.3rd Party Costs(GFE Lines 3-8)    $4,250.41                                   .
.Prepaid/Escrows(GFE Lines 9-11)   $1,936.05                                   .
.                                                                              .
.                                            Total Costs            $190,463.46.
.Total Loan Amount               $184,192.00                                   .
.Actual Good Faith Deposit             $0.00                                   .
.Lender/Promotional Credit         $3,925.29                                   .
.                                                                              .
.                                                                              .
.MIP Refund                          $397.32 Less                   $188,514.61.
.                                            Act Cash From Client     $1,948.85.
F,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,G

They're telling me the cost of the refi is offset by the $3925.29 credit they offer plus the $397.32 MIP refund, so there is no cost out of pocket. They want me to pay $1,948.85 into my new escrow account and when my old escrow account is closed I should receive a check for $1936.05 (its current balance).

Does this deal make sense? Why is my mortgage insurance so much higher on the new loan?

Answer 1

In the spring of this year FHA increased their rates for Mortgage Protection insurance. (I am looking for a good refernceon the government website)

Non Government reference

Annual MIP

For an FHA Streamline Refinance that replaces a FHA loan endorsed on, or after, June 1, 2009, the annual MIP varies based on loan type and loan-to-value.

The annual MIP schedule, for loans with case numbers assigned on, of after, June 1, 2009 :

30-year loan terms with loan-to-value over 95% : 1.25 percent annual MIP
30-year loan terms with loan-to-value under 95% : 1.20 percent annual MIP

For your example the monthly payment would be:

$184,192*(1.2/100)*(1/12) = ~ $184.19

You were quoted 179.57 a month

Answer 2

The PMI premium you pay is dependent on a very large number of variables in the finance market. Mortgage insurance, at the higher inter-bank levels, is handled with credit default swaps (the ones you've been hearing about on the news for the past 4 years), where the lender bundles a block of mortgages, takes them to a guarantor like AIG or Freddie Mac, and says "We bet you that these mortgages will default this month, because the homeowners have little or no equity to deter them; if we win, you agree to swap these debts for their current face value". The lender examines the mortgages, calculates the odds of a default severe enough that the bank would come to collect, using complex environmental heuristics, multiplies by the value of the potential payout, adds a little for their trouble, and says "well, we'll take that bet if you pay us $X". The bank takes the deal, then divvies up that cost among the mortgages and bills the homeowner for their share.

The amount you pay for PMI can therefore depend on pretty much anything in this entire process; the exact outstanding amount and equity status of your loan, the similar status of other mortgages your loan will be bundled with for assessment, who the guarantor is, what exact heuristic they use to come up with an amount, the weighting the bank uses to divvy it up, and how much they actually pass on to you.

Most of these same variables are at play when you shop for actual insurance for your car or home, which is why your premiums will go up or down with the same insurer and why someone else always seems to have a better deal (pretty much every insurer can say that "drivers who switched saved an average of $X"; of course they did, otherwise they wouldn't have switched). Thinking of it in those terms, it's easy to see how this number can vary widely based on numbers you can't see.

You're free to say no, and it will cost you nothing right up until you sign something that says you agree to be penalized for saying no. While the overall amount of the payments does decrease, the PMI has gone up, and that's money you'll never see again just like interest (except you can deduct interest; not PMI). I would do the tax math; find out how much you could deduct over the next year in interest on your current loan, then on their proposed terms, and what the resulting tax bills will be from both. You may save monthly only to pay more than you saved to Uncle Sam at the end of the year.

You're also free to negotiate. The worst they can do is stay firm on their offer, but they may take a second look and say "you're right, that PMI is rather high, we'll try again and see if we can do better". They can either negotiate with their insurer, or they can eat some of the PMI cost that they're currently passing on to you.

Answer 3

If you're refinancing a conforming (Fannie Mae or Freddie Mac) mortgage, don't go with an FHA. Try a HARP refinance, which won't increase your mortgage insurance even if your home has lost value. HARP also limits the risk-based pricing adjustments that can be charged, so your rate should be very competitive. With an FHA mortgage, even once you get the loan-to-value ratio down to 80 percent, you still have mortgage insurance for several years, plus the upfront costs. In your case, I think it's a bad deal.