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I am about to buy a house, but my only real option is to get a FHA loan for the mortgage.

I plan on staying in this house for a long time, so paying the MMI / PMI for most of the term of the loan (longer than I would have to with a traditional loan) does not make sense to me.

I want to pay the loan off well before term, but which method makes more sense financially?

  1. Stick with the FHA loan full term.

Make additional payments and / or pay more per month. Buy points during the initial financing.

  1. Refinance in a few years.

Put the money that would go to #1's additional payments into a savings account. Pay the required amount each month, and then refinance in a few years. Use the saved money to pay down the principal directly and buy points.

  • Eligibility to refinance (and not pay mortgage insurance premiums) depends on your LTV ratio. I'm in the same boat, as I just got an FHA mortgage last year. I'm just paying extra per month. Refinancing usually carries fees of about 3%-5% of the remaining principal, and you should be sure the loan you're getting doesn't carry any pre-payment penalties. Additionally, since interest rates are lower now, you may not want to re-finance later. – Noah Jun 2 '14 at 15:25
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You would have to do the specific math with your specific situation to be certain, but - generally speaking it would be smarter to use extra money to pay down the principle faster on the original loan.

Your ability to refinance in the future at a more favorable rate is an unknowable uncertainty, subject to a number of conditions (only some of which you can control).

But what is almost always a complete certainty is that paying off a debt is, on net, better than putting the same money into a low-yield savings account.

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