Refinancing an FHA Mortgage in Exchange for LPMI

by Denise

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

Ask Kate at Get-Your-Best-Mortgage-Rate.com
Dear Denise,

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

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LPMI Refinance Help
by: Ken from Leland, N.C.

You say in your answers that it is possible to refinance a loan that has LPMI. My home in North Carolina is about even between value and mortgage owed but I cannot find a bank or mortgage company that will do it.

I have excellent credit and income. My mortgage is with BOA. Can you give the names of banks or mortgage companies that will help with a HARP with LPMI.

Hi Ken, Kate here...

I hope available mortgage lenders reading this will comment with their names and phone numbers if they believe they can help you. (If I were still originating home loans, that's what I'd do!)

But back to lender paid mortgage insurance. Here's the deal. Fannie Mae and Freddie Mac have allowed HARP refinancing for homeowners insured with LPMI for almost a year. But this does not stop certain lenders from adding overlays. Go to HARP 2 Program Guidelines vs Infuriating Lender Overlays to learn about overlays.

You didn't mention if you've contacted Bank of America. I'd start there since they service your loan.

But I'd also ask friends and relatives which mortgage professionals they've used for HARP 2, whether or not your acquaintances have lender paid mortgage insurance.

Here's why I say this - The mortgage originator is as important (if not more so) as the bank itself. So get a hold of a professional through a referral and ask if he or she refinances loans insured with LPMI.

If not, ask who does. This way, you will get current HARP contacts, as opposed to a quickly outdated list.

Best wishes, Kate

Refinancing an FHA Mortgage in Exchange for LPMI - Thanks for Replying
by: Denise

Hi Kate, Thanks for replying - I talked to the Mortgage guy I'm dealing with today and asked him to run up the numbers for me.

He's adamant that I will not have a problem refinancing in a year or two or more if I choose to, given my salary and credit score (800). I think I do need to read more about HARP though as I don't fully understand how that affects refinancing.

I'll read the small print carefully and see how things look when he runs the numbers.

I'll keep reading your website. My aim is to do exactly what you said in your book, regardless of PMI, LPMI. I have no loans other than my mortgage and have no other debt. So figure I should focus on cutting my mortgage as much as I can and save interest.

I'm making that my goal from now on!

Many thanks - great website!

Cheers, Denise

Hi Denise, Kate here...

You are welcome! My door is always open!

Best wishes, Kate

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