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I listen to talk radio. In fact, I rarely listen to music (which is funny for a guy who got an audio degree). And one thing I noticed is the commercials on talk radio stations seem to be much more sophisticated than those on the Top 40 radio stations. Here’s an example; I was listening to a music station for some reason (probably because there was a story on the talk station about a stupid celebrity doing something stupid again), and the first commercial that came on was for a company that staffs lawyers specifically to help clean up your troubles after getting a DUI (or multiple DUI’s, which apparently these people are experts at). Awesome. They are assuming if I listen to Top 40 constantly that I will drink heavily because of all the mind-numbingly bad music and end up getting a DUI. I flip back to the talk radio station and there’s a commercial from the radio host talking about how he’s refinanced his mortgage 4,300 times and has THE BEST RATE IN THE HISTORY OF POSSIBILITY! They pitch it hard, telling me to get in now, or I might lose out on these historically low rates! And though I usually want to crash the car right then due to the abysmal writing and acting for these commercials, I realized that they may be right about this one. Time to call the 800 number.
Our Home
We bought our house in 2010, and got a decent (at the time) 5% interest rate on our mortgage. We were happy with the rate, and haven’t really thought about refinancing because it probably wouldn’t be worth the hassle. Honestly, it has just been a bit of laziness on my part to not do the research and find this out. Something about listening to the same radio ad 1,423 times in a week got me motivated enough to make a phone call to the Re-Fi company and see if I could benefit at all.
Increased MIP
I chatted with the friendly fellow on the other line for a while, explaining my situation. We have a $313,000 FHA mortgage at 5% interest rate, and are paying a Mortgage Insurance Premium (or MIP). Our house does NOT have anywhere near 20% equity (probably more like 0%), and we were looking to see if we could save any money by refinancing our mortgage. He asked me what I was currently paying for MIP, and I could not find it on my monthly statements. So we reverse-calculated the costs of taxes and insurance, and found that I was paying roughly $145 a month for MIP.
He let me know that the government changed the MIP rate TWICE for FHA mortgages since we bought our home, and no, it didn’t go down (it’s the government, why would it). After punching in a few numbers, he stated that not only would our MIP go from $145 to (OMG!) $325 a month, but we would also have to add $5,477 to our mortgage as part of the capitalized up-front MIP cost. So we’d be paying interest on that. WOOHOO! After calculating the “savings” from lowering our interest rate for 5% to 3.75%, we only had the potential to save about $50 a month ($231 interest savings minus the $180 increase in MIP).
But, we should also note the “loan origination fee” for refinancing our mortgage is typically about 1% of the total mortgage, so that’s $3,000 up front cash. Plus, another $400 to get the home appraised to make sure we’re not over the maximum LTV (loan-to-value) range for the refinance. SUPER! Not to mention, our “5 year MIP term” resets upon refinance, which means we’re stuck with this MIP payment for another 5 years, minimum.
The Wash
Taking all these factors into consideration, let’s look at the potential savings. We’re at $50 savings a month, times 5 years, which puts us at a $3,000 savings. Ok, so we’ve wiped out the origination fee. Assuming that we’re at 78% LTV at that point, we can kick the PMI, and go back to the $231 savings. Another 2 months, and we’ve knocked out the appraisal fee. So, it looks like if we plan on staying here another 5 years and two months, we can break even. BUT WAIT! You forgot about the up-front MIP cost. OH NOES! That’s another $5,477 that was tacked onto the principal and interest has been charged on that amount for the last 5 years. So, $5,477 x 3.75% x 5 years = over $1,000 in additional interest. So, to ACTUALLY BREAK EVEN, we would need to be in our home for roughly 3 more years. And this doesn’t even take into account that our MIP would disappear much sooner if we DON’T Re-Fi.
Conclusion
So, taking all of these factors into consideration, we have decided that it’s not worth the hassle to try and refinance our home. We would have to go through some kind of streamline Re-Fi process because of our lack of home equity, it would drag on forever, and we would burn WAY too much time on this for almost no return on investment, even if we stay here for 8 more years. Since we plan on moving about that point, it would be pointless and a waste of time to pursue a home refinance right now.
Comments: What are your thoughts? Is there anything I missed here? If you were in my shoes, what would you do? Would you refinance our home? Sell it? Light the thing on fire and collect the insurance money?
We have refinanced our residence and our two rental homes in the last year or so….and none of our fees were as high as yours. Maybe you should call another bank. Use the calculator above to see what the interest savings would be over the 30 years of the loan. You may be able to refinance into a home loan that is not FHA and avoid that giant MIP jump. We have never had a FHA loan.
We refinanced all of ours into 15 year loans and you may check that out as well. Usually the interest rate is lower. You can also wrap your fees into the loan instead of paying closing costs up front. We did that with our rentals because basically our renters will pay the fee via their rent. It made sense and we were still saving tens of thousands of dollars of interest by refinancing.
I would try a few different banks and see what they come up with. Also call Quicken. We refinanced our last rental with them, completely online. It was the easiest thing I have ever done and they even came to my home to do the closing.
Thanks Holly. Since we don’t plan on keeping the mortgage for more than another 8 years or so, the 30-year savings wouldn’t make much of a difference. Good idea about rolling the fees into the mortgage, but then I’m paying interest on them. Not a huge issue, I guess, if the savings outweigh the costs.
I will check out Quicken, as I’ve been referred there a few times now. The two companies I have talked to previously basically stated that I’m stuck on FHA because of the MIP. Like I can’t re-fi out of the FHA loan until MIP is gone, or something.
That is the key like you said- roll the fees in if the savings outweigh the costs! With our rentals, it worked out fine that way. Like I said, the renters pay the mortgage and we still end up way ahead as far as how much interest we are paying.
I have never had a FHA loan so I guess maybe that is why I don’t understand the whole MIP situation fully.
Yes, totally agree. I need to see if there are other options for me that can increase the possible savings so it IS worth it. Stupid FHA :\
I hope that you will write a follow up post to let everyone know what you find out. Hopefully after you call around you will find a good deal. If you do, you will likely save thousands and maybe tens of thousands of dollars! =)
You know, until talking to the broker today, I totally forgot one major factor: Our income went down a lot because my wife is now at home…I’ll know in a few days how it turns out.
Hmmm…I’m not an expert on the differences between conventional and FHA, but have you looked at a conventional loan? The PMI on those are much less expensive (to my knowledge), but I think you may have to have at least 5% equity although I’ve heard there are some places that will finance 97% or 100% in some cases.
The rates on a 30-year are just too cheap right now not to call a few more places and find out.
i think I’ll call a few more places. From the two places I talked to, they basically said I’m stuck in FHA for now :\
We refinanced about 18 months ago and our fees were no where near that. I agree with Holly that it might benefit you to contact a few other lenders to check out their fees.
Seems to be the consensus. I’ll give it a shot. I’ve been through the details with two companies, and it has not worked out yet.
I can see where you are cominG from. We refi’d last year, and our fees were about $5K on a $110k loan. (Florida is known for some of the highest mortgage fees in the US!).
For us, the numbers worked even with the high fees – but we didn’t have any PMI mucking up the process.
As others said, might be worth a call to another lender to double check the fees, but unless you can get around that PMI, seems like you guys made the right decision.
Yea, it’s a HUGE bummer. And because we don’t have 78% LTV, we’d have to go through a special process or government program for the re-fi…
That’s a horrible deal! Our first home was on an FHA loan, and I hated the PMI, but that was the only way we were able to get loan at the time without much job history. We refinanced that a couple of years later without 20% equity. Somehow the bank let us put some of the mortgage on a HELOC to get the equity. It sounds a bit screwy, but it worked great, we saved money, and got rid of the PMI. Not that that would work in your situation, but I would call a few other people and see what’s available. We just refinanced to 3.25% earlier this year. Of course, if you plan on moving pretty soon, I’d just leave it alone.
Ya’ know, this seems like it should work. We don’t have much equity, but I wonder if we can re-fi to some kind of 80/20 to eliminate PMI…? Is that what is was?
I am lucky in the fact that I have a small mortgage but it also makes it cost prohibitive to refinance. Why would I pay thousands in fees to reduce my mortgage rate 1% on a roughly 60k loan?
Yea, re-fi’s aren’t for everyone. You’ve got a small mortgage, might as well just kill it and don’t worry about a re-fi. The ROI probably wouldn’t pan out on such a small loan.
Jake you might look into a program called HEFFA ( making homes affordable) it should be offered through your currant lender and its a goverment sponsored program to help people whole are currant on their mortgage but maybe have little or no equity can reduce your rates with no qualifying and no apprisal I do believe their are traditionsl fees but might be worth a shot. Most folks whole bought a few years ago and their homes lost value could not qualify for a refinance so this is is some cases their only option. FHA when we first bought was mostly used by first time home buyers because young folks cannot afford to put 20% down as required on a conventional loan but now folks who forclosed or sold short have it as an option to buy again after 3 years as its 7 years for conventional loans. Our currant lending is very very tight and you have to be near perfect credit to qualify.. Thx
I asked about that program, but they said is doesn’t reduce your overall laon balance or interest rate, just defers it. I contacted a broker today to run the numbers again, so we’ll see how it goes. Thanks Joe!
Very useful article. I’m not an expert on this subject. But there are so many persons who are thinking to refinance their mortgage. I think this is a good idea finding an another mortgage with low interest rates.
But to do this, it necessary to check with different lander to find a great offer.
Agreed. i reached out to a broker today, we’ll see if I even qualify.
You are very smart. If you have an FHA loan it is harder to make the refinance work out.
Lol, I don’t know about that. Smarter people here have already told me how I’m doing it wrong 🙂 And agreed, FHA is annoying, but it’s the only way we got into our house.
Those fees are kind of ridiculous. You should shop around a bit and also see if you can lessen the years of the loan as well. We went from a 20-year to a 15 and saved a bunch.
I submitted my info to a broker today to process, and I should know in a few days if I qualify 🙂
This is the problem! I’ve read that taking 1% off your mortgage can save you 1000 a year on average, but those fees make it a moot point.
Here in the UK, most of the really good deals with low fees and excellent savings are only available if you have equity. I’ve literally seen banks only offering refinancing on 65% LTV!
You COULD have burnt it down and claimed the insurance, but you published it here now. 😉
I have submitted my info to a broker, hopefully we can get something worked out. If we save enough to pay off the fees within 2 years, it’s probably a deal I am going to take. And yes, I have now outed myself, so the house burning down now has a paper trail….hmmm…
Since this is a US mortgage conversation, I won’t comment much on it, since my knowledge is limited. However, I’ll recommend two things: Get a mortgage broker to shop for you (saves you time) and negotiate. Many forget that you can negotiate even with the big banks, and if you’re not happy. Walk away!
Cheers!
Eddie
I have reached out to a broker, and am waiting to hear back. I think having them work for me is the best way to approach this 🙂
Thanks Eddie!
We recently refinanced our 30-yr fixed from 6% to 3.75 at our Credit Union. We qualified under the Government’s HARP effort. We were slightly underwater and current on our payments (which is what this program is designed for). Our Conventional mortgage doesn’t have an MIP and never has. I don’t know if that’s due to my particular Credit Union or if it applies to all credit Unions & Convention Loans. I don’t want to ‘spam’ your site with the name, but if you’re interested contact me directly at the email address I gave.. I’ll send you the info.
And no, I don’t work for them.. just trying to help folks save money 🙂
FHA kind of kills most of our options. We are looking at the Streamline, but with the increase in MIP, might be a wash. We’ll see…
In the commercial mortgage market, the majority of deals are either fixed rate or variable rate.