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My fiance and I bought a house in April 2013 using a FHA loan, 30-year fixed. We only had to put down 3.5% so of course a good bit of our monthly payment is PMI. I got a call today from the same lender wanting to refinance us into a 25-year loan and I am told the monthly payment may be the same or close to it, and origination fees, closing costs, etc. may be covered - theoretically nothing for us out of pocket.

Our incomes are appropriate for the loan and both of us have credit in the high 700's.

What we have now:

  • Current monthly mortgage payment: $2364.44, of which ~$350 is PMI
  • ~$35k PMI to be paid through April 2043, or until we reach 80% loan-to-value and refinance
  • With PMI, my effective interest rate is about 4.30% ~$232,000 total paid in interest - $348,000 borrowed
  • ~$615,000 total cost of credit (?)

Other numbers:

  • ~$3700 annual property tax
  • ~$1000 annual homeowners insurance
  • Appraisal required; they'll be looking for $368000 home value (we're probably there)

The lender proposes:

  • 25-year loan fixed at 4.75%
  • ~$246,000 total paid in interest
  • $348,000 borrowed
  • $0 PMI
  • ~$594,000 total cost of credit (?)

We anticipate living in this house for no more than 10 years, possibly less. In my mind, we'd be putting down no additional capital to shorten the term of the loan while keeping a same-ish monthly payment, and knocking off $19k in total cost of credit. Of course, since my lender called me about it, they think it is to their advantage I do this...and therefore must be detrimental to me?

I understand LPMI is a one-time switch and the higher rate will haunt us until 2038. Or, we might wait to refinance when we have 80% loan-to-value to eliminate the PMI altogether. (Can't figure when that would be.) As I said we'll probably live in the house for no more than 10 years.

This is the first I've heard of LPMI and am just trying to wrap my head around the concepts. Any thoughts on how this might play out are much appreciated; the lender will call me tomorrow to presumably lock-in the rate and schedule the appraisal (at their cost).

Why are they doing this and should I consider it?

  • What is the proposed new payment? When comparing mortgages, flipping from 30 to 25 distorts the numbers. The total cost of credit is actually meaningless. A 100 year 1% mortgage will have a higher total payment than a 5% 10 year loan. Which do you prefer? If your effective 4.3% is correct, moving to 4.75% doesn't make sense. And part of why it's probably wrong is PMI should come off at 78% LTV. Last if you will only be there ten years, a different set of calculations apply. Great question, not a simple answer. More detail may be needed. – JoeTaxpayer Nov 12 '13 at 20:54
  • Thank you. Let's assume the average, that we'll be here for about six more years. I don't yet have the new proposed payment but the lender says it will be the same, or very close to it - so let's assume $2400 monthly. Presumably, the $350 in PMI is replaced with classic mortgage interest which we can deduct in April. – Ryan Nov 12 '13 at 21:51
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$348K, 4.75%, 25 years = $1984/mo payment.

$348K, 30 years, 2014.44/mo payment is a 5.68% APR.

What am I missing? I don't see where the 4.3% is coming from.

  • Sorry, I saw no mention of escrow in the question. – JoeTaxpayer Nov 13 '13 at 4:16
  • Yes, sorry. For detail: per the Settlement Statement from April: $initial loan amount is $348,570.00 / 30 yrs / 3.7500% / principal + interest = $1968.15 / monthly escrow in the amount of $396.29. This includes PMI, homeowners insurance, and property taxes. Those two amounts together are $2364.44, the currently real monthly payment. So the PMI chunk is effectively $400 per month (minus homeowners + property taxes) through the next (six-ish? without prepayment?) years or so, dropping abruptly to zero when we are at 78% LTV or we refinance is 80%? – Ryan Nov 13 '13 at 4:21
  • Specifically, per the lender's docs: P+I $1614.29 / Homeowners $81.17 / Property Tax $315.12 / PMI $353.86. Apologies for not delineating this earlier! – Ryan Nov 13 '13 at 4:34
  • @Ryan - If your balance is not going up, and the payment also not rising more than a few dollars, but the time remaining drops to 25 years, this sounds good. It means the PMI payment now goes to paying off the mortgage faster despite the slightly higher rate. PMI is really money down the drain. – JoeTaxpayer Nov 13 '13 at 18:51
  • Thank you. Initially deferred as I wanted to hold out for something a little sweeter. As if on queue - seven days after the first call - lender says they can get us 4.375% with same terms as before. I'm doing my due diligence now but think we may go for it. – Ryan Nov 19 '13 at 19:29

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