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 (?)
- ~$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?