Mortgage Refi Dilemma

[SoonerTexan]

DH and I are mulling over what to do. We bought our home in 2012 with an FHA loan and minimal down, so we have PMI. Luckily the market has been awesome here, and conservatively, our home is now worth about 20% more than we paid for it. So we've decided to refinance and get rid of PMI before I potentially lose my income. We expect to live here for another 4-6 years. After that point we will definitely be selling and moving into something bigger, whether it is because we have to move for Fellowship/The Job or even if we stay. If we get to stay, I see us staying here an extra year or two to save up money, but we have pretty much filled up the place with kids already.

We're mulling over 2 options (closing costs are rolled into all these, but I have a separate itemized list and we can pay cash if we want):

• Refinance into another 30 year (.25% rate increase), which would reduce our monthly payment by $150.
• Pros: This gives us more wiggle room in monthly expenses when we only have one income.
• Cons: We start the mortgage clock over and the rate is a little higher

• Refinance into a 20 year (same rate as we have now). This increases our monthly payment by $50
• Pros: It's doable. It would also leave us with a really nice chunk of cash to use as a down payment on a bigger home later on.
• Cons: It's going to be more of a squeeze, obviously, though $50 isn't much. My bigger concern is our home insurance and property taxes have gone up 25% (thanks Texas natural disasters) since we moved in and added a lot to our monthly payment. I think we've seen the majority of the bump, but I still expect it to go up a bit for the next year or two because the market is so strong and our tax appraisal hasn't quite caught up.

What would you do?

[scarlett09]

Can you refi and keep your PMI? We are also FHA and we did a refi in February and were able to take advantage of a lower interest rate on both the PMI and the mortgage as a whole. Our goal is also to get rid of the PMI eventually, but we aren't there yet financially. I would take whatever option gives you a smaller monthly payment. Good luck! 😊


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[Pollyanna]

How about a physician loan?

[SoonerTexan]

Can you refi and keep your PMI? We are also FHA and we did a refi in February and were able to take advantage of a lower interest rate on both the PMI and the mortgage as a whole. Our goal is also to get rid of the PMI eventually, but we aren't there yet financially. I would take whatever option gives you a smaller monthly payment. Good luck! ��

We can get rid of PMI completely now that the loan to value ratio is low enough. Is there any reason to keep it? At best, we are going to get the same rate because it was pretty near the bottom when we bought the house (3.75%)

How about a physician loan?

I forgot about those. Worth checking into. Although, I thought the big draw of those was putting very little down, but aren't they usually at a slightly higher than market interest rate? I'm not sure if it would buy us anything because we technically "have" the 20% now that the home value has gone up.

I need to sit down and figure out what the total cost difference between the two options is. I know we would be savings thousands by going for the 20 year, but I'm not sure exactly how much. It isn't the easiest math.

@spottydog ? @White coat investor ? Or is it [MENTION=4825]Whit[/MENTION]ecoatinvestor ?

[MsSassyBaskets]

I would do the 20 year. $50/month is worth it for a shorter term and lower rate. Just my knee jerk reaction.

[MrsK]

physician loans are not at a higher interest rate. The benefit though is that you can put down very little and not pay PMI.

Personally, I'd go with the 30-year term and make extra payments. That way, you can pay it down sooner if you want to but you don't *have* to. I've always paid down debt early/made extra payments and have saved a lot of money that way but -- for instance, when I lost my job, it really helped out to be able to pay less without going into default.

[ladymoreta]

I would go with the 30 year. $150 extra a month will be awesome when you're not working, especially if you decide to send N to preschool when she's 4. It's not the technically correct answer financially, but it could make your quality of life a lot better.

[OrionGrad]

Personally, I'd go with the 30-year term and make extra payments. That way, you can pay it down sooner if you want to but you don't *have* to.

This is what I'd do, too.

[TulipsAndSunscreen]

I agree to do the 30 year and if, for now, you want to pay like it's the 20 year because you have the income, you can do so. Seems like the best of both options.

[Pollyanna]

You get get very low rates with a physician loan, plus no PMI. do you have Suntrust or Regions? I think 5/3 has a physician loan as well as Compass and WF. I would check on what you could get for sure.

[SoonerTexan]

I need to do the math, but I don't think paying extra each month on a 30 year helps much in the long run--I know you can have it applied directly to the principal, but I'm wondering if the higher rate/longer term will make most of it a washout in the end. KWIM? Like how much extra would I have to pay on a 30 year per month to equal just paying the normal monthly payment on a 20 year? Although, yes, it does give me flexibility.

[spotty_dog]

I'm curious too, I'll play with the math for you if you want. I am usually in favor of a shorter duration and lower rate, but in your situation where things are looking a little uncertain in the next few years, I think that the lower monthly payment is what sounds better to me.

Alternatively is there an option through your mortgage provider to just get an appraisal that shows you have 20% equity now, and get PMI knocked off that way? It was an option for us, but I think we had to hold the loan for 5 years first.

Suntrust told me that if we had even 5% to put down, we were dumb to look at physician loans, because of the rate difference. This may vary by who's offering the loan, of course!

[poky]

Yeah, the only thing paying extra on the 30-year really buys you is the flexibility to pay less with no hassle. Essentially, you're making the same payment, but because of the higher interest rate, you never really catch up to where you'd be with the 20-year at the lower rate. If you can swing the higher payment consistently, that probably makes the most sense.

I played around with this calculator: http://www.bankrate.com/calculators/...alculator.aspx, since it allows you to add extra payments ("show amortization table" once you calculate).

[spotty_dog]

Say your house is worth $200k and your mortgage is $180k. You get a 30 year at 4% and pay the minimum. In 5 years you've paid $33,822 in interest and paid the loan down (gained equity) by about $17k. If you get a 30 year and pay an extra $200 per month (to make the payment the same as the 20 year), then in 5 years you've paid $32,606 in interest and paid the loan down by about $30k. If you get a 20 year at 3.75% and pay the minimum, then in 5 years you've paid $30,321 in interest and paid the loan down by over $32k.

So the 20 year only gains you $2k in net worth over those 5 years compared to paying the same on a longer mortgage, but locks you in to paying $12000 more in monthly payments.

[SoonerTexan]

Alternatively is there an option through your mortgage provider to just get an appraisal that shows you have 20% equity now, and get PMI knocked off that way? It was an option for us, but I think we had to hold the loan for 5 years first.

It's FHA, so I think we have to have the mortgage for 5 years before that applies...so two more to go. But definitely worth checking. That would be the easiest option.

I just found Bankrate's handy amortization calculators...the difference would be a $2k savings if we sold in 4 years. Not huge. It's way more worth it if we were staying at least 10. I've toyed with the idea of keeping this as a rental at some point, but that is just too much unknown to try and factor in.

xposted with SpottyDog.