We are no cost refinancing (rate and term) our mortgage that we took out back in July with a 90% LTV. Our intent was to sell our old house after we moved to the new one and then put enough of the proceeds into the refi to get to 80% LTV and get rid of PMI.
What would you do if your PMI was $55/month ($660 annually) and you had to put another $24,790 down to eliminate it? Does that seem worthwhile vs. investing the $24,790? We will pay around $3,700 in PMI total before we got to 80% LTV in about 6.5 years.
Interestingly enough, if we put the additional 10% into the refinance directly, we will have to take a higher interest rate or pay some closing costs due to the lower amount borrowed reducing the rebate. So if we do put the additional money into the loan, we will do it after we close as an additional principal payment.
So, I see three options at this point. 1) get to 80% LTV with lump payment shortly after close and eliminate PMI immediately, 2) make $100-$200/month additional payments to shorten the time it takes to get to 80%, but still pay about $1,700 over the years, or 3) do nothing and pay PMI for 6 years or so
This sounds strange. Yes, the points rebate is smaller with a smaller loan. However, usually the loan fee charge is higher at the higher LTV (before adjusting for credits from increasing the rate).
PMI isn’t the only factor. As far as I know, you might not be getting the best rate or fees/credits because of a non-conforming loan, so you’re screwed thrice (not just by PMI). I could be wrong.
I may be missing something but did you compare the 90% LTV refi with more than one 80% LTV lender? Usually a 20% down conventional is cheaper in fees or would provide higher rebates than a 10% down conventional so this sounds unusual.
What would you do with the $23k if it wasn’t tied up in the house? Compare your PMI savings vs the opportunity cost on what that $23k would likely return for you if you put it elsewhere. Also factor in any risk associated if you were to invest it vs parking it in savings or a CD. Cash on hand is often better than tied up in a house too, but not often at the cost of paying PMI.
If you can afford to avoid PMI, then best to do so. It makes no financial sense to intentionally to pay extra for PMI for another 6 years. It”s unnecessary insurance you are paying to lender if you have financial ability to put down 20%.
I am not sure why it works that way, but all of the websites I searched including Zillow showed me higher rates or lower credits for the 80% LTV loan vs the 90% LTV. I don’t know if it is the size of the loan (20% would put it under $200,000), location, or what, but it was consistent across all of the lenders I checked who had competitive offers to start. It helped a couple of credit unions/larger banks I checked, but their offers were “bad” to start.
Just ran the numbers thru Zillow and here are the results for both the 80 and 90%.
90% – Lowest APR - 3.750% rate and $301 credit; lowest fees - 3.875% and $1,308 credit
80% – Lowest APR - 3.875% rate and $437 credit; lowest fees - 4.375% and $ 959 credit
Loan we applying for now is 90% LTV @ 3.875 with $2,787 credit (about $225 more credit than the one above after accounting for lender fees baked into the one above).
Here are the terms for our current loan which sounds like it is boiler plate for the law:
BORROWER REQUESTED CANCELLATION OF PMI: Under the Homeowners Protection Act of 1998, if your loan closed on or after July 29, 1999 as a single-family primary residence, you have the right to request that PMI be cancelled on or after either of these dates: (1) the date the principal balance of your loan is first scheduled to reach 80% of the original value of the property or (2) the date the principal balance actually reaches 80% of the original value of the property. PMI will only be cancelled on these dates if (1) you submit a written request for cancellation; (2) you have a good payment history; and (3) we receive, if requested and at your expense, evidence that the value of the property has not declined below its original value and certification that there are no subordinate liens on the property. A “good payment history” means no payments 60 or more days past due within two years and no payments 30 or more days past due within one year of the cancellation date. “Original value” means the lesser of the contract sales price of the property or the appraised value of the property at the time the loan was closed.
If they hold me to the good payment history, sounds like it would have to be cancelled at 78% automatically.
AUTOMATIC TERMINATION OF PMI: Under the Homeowners Protection Act of 1998, if your loan closed on or after July 29, 1999 as a single-family primary residence and if you are current on your loan payments, PMI will automatically terminate on the date the principal balance of your loan is first scheduled to reach 78% of the original value of the property. If you are not current on your loan payments as of that date, PMI will automatically terminate when you thereafter become current on your payments. In any event, PMI will not be required on your mortgage loan beyond the date that is the midpoint of the amortization period for the loan if you are current on your payments on that date.
Thanks everyone. Sounds like everyone agrees that PMI is not worth it so it looks like we will proceed with the no-cost refi and then get rid of the PMI shortly afterward.
Mine is different from your situation, but I determined it was worth it to pay down the mortgage to the point where it eliminated the PMI. I paid $14,700 toward the principle and eliminated the PMI of around $110/month. Over the term of the mortgage the PMI amounted to $6,400, but the real win was eliminating over $21,000 in interest on the principle.
There is no such thing as a no-cost refi. Fees are wrapped into your loan and therefore you end up paying more interest later on and will take longer to pay down the principal. The advantage is that you don’t have to put up more money upfront.
You are splitting hairs here and no fees are being added to my loan. I am refinancing to a lower rate with the same outstanding principal as the previous loan with no money out of my pocket. I (and many other people here) consider that to be no-cost re-fi since it doesn’t cost me anything. Yes, my interest rate could have been slightly lower, 1/8 to 1/4 maybe, if I decided to pay out of my pocket for the refi, but it wouldn’t have made financial sense for me to pay fees to lower the rate that little bit at this time.
That’s not entirely correct – the fees are wrapped into the loan, but this doesn’t necessarily increase the interest rate. Mortgages are issued with interest rates rounded to the nearest 1/8th of a point, but the actual market rate is not rounded, and the difference between the two numbers has a cash value. The costs could be wrapped into this cash value, so it is possible to do a refi with $0 out-of-pocket or even negative cost (you get paid) without any increase in the interest rate.