Refinancing an FHA Mortgage in Exchange for LPMI
Ask Kate about refinancing an FHA mortgage in exchange for lender paid mortgage insurance (LPMI): Denise has been offered a refinance package with a better interest rate. It will lower her monthly payment by $225 a month. So far so good, right? But here's the catch. Because of insufficient equity, her mortgage will now be saddled with LPMI, lender paid mortgage insurance.
Denise asks Kate about Refinancing with LPMI vs Current FHA Financing
Hi Kate, I just bought your book (The Mortgage Freedom Project) and am about to start reading it. I do however have a question you might be able to advise on.
I got an FHA Mortgage in March 2010 with 3% down, borrowing $263,000 at 4.875% (paying PMI as well so monthly cost of $1675 repayment). I've kept watch on the market and was continuously told it wasn't worth my while refinancing.
But recently after reading about FHA increasing PMI costs, I contacted my Suntrust people again.
Now they are offering me a refinance plan that saves me $225 per month but have explained that they are including closing costs of $6,500 and they are providing LPMI (they pay the insurance).
I've done some reading online as I'd never heard of this but from what I read, it's better to stick to the PMI I'm paying as it cancels out when I hit 78% LTV whereas I'd have to keep paying the LPMI on the new rate of 4.25%.
The deal would be my mortgage payments drop by $225 per month with a new rate of 4.25%. But as I have no plans to sell my condo in the future, am I wiser to stay as I am and try to pay more down on my principle? Or should I consider saving the $225 per month on the new rate and using that savings to pay down principle each year?
The condo was appraised at $285,000. I also read that with LPMI you can claim more interest rebate on taxes. Any thoughts?
Many thanks if you have time to advise. I can't figure out which is better to do - save the extra $225 per month and pay more off principle or stick with PMI now and have it go away eventually at 78%. But then I'm still paying a higher rate (4.875%) vs. the new rate of 4.25%.
Should I take new offer and then hope to refinance again in 2 years or so?
Kate's View on Home Loans with Lender Paid Mortgage Insurance
LPMI has been the source of frustration for many homeowners who've wanted to participate in the Making Home Affordable Refinance Program (HARP)
Hindsight being 20/20, I believe many homeowners wish they'd approached lender paid mortgage insurance with greater reluctance. But I can understand the savings of $225 a month is attractive.
In general though, I've cautioned homeowners about accepting inferior mortgage terms today based on the hope of improving their financing via a refi in a couple of years. This last decade, America has learned the hard way that refinancing for a lower mortgage rate can never be guaranteed
Carefully Consider Financing with Lender Paid Mortgage Insurance
Do this! Assume that you will need to retain the new mortgage with LPMI until you have paid it off in full. Then ask yourself if your lender's offer is still a good deal.
Another area of caution. Be careful when you read that with LPMI you receive more interest deductions from the IRS. How much is 'more'? $2? $2000? Annually or over the life of the loan?
On the flip side, assuming it's true that you'll keep the mortgage insured with LPMI for only a few years, the brevity could render the tax benefit inconsequential. But only a CPA is qualified to give you individual tax advice based on your personal circumstances.
So read the LPMI fine print if you decide to go forward with the refinance and don't be shy. Ask your lender a boat-load of questions. After all, it's your
mortgage and only you
are responsible for making the payments. See When Lender Paid Mortgage Insurance Is Clear as Mud
The Mortgage Freedom Project
I suggest before making a final decision about your refinance that you finish reading The Mortgage Freedom Project
. My goal is for homeowners to take control of their finances instead of depending on the bank to better their position!
Thank you for buying my book and contacting me,
Ask Kate about Your Mortgage
Anyone can ask Kate a question
or add a comment. (To comment, look for the link at the bottom of this page.)
Have You Seen These Ask Kate Answers
Tell Your Friends
My goal is to empower homeowners! Please spread the word about Refinancing an FHA Mortgage in Exchange for Lender Paid Mortgage Insurance (LPMI)
with your friends!