I am considering a streamline FHA refinance. After looking at the numbers, it appears I can break even in 10 months. Currently, my principal is $308K, and after refinancing, it would increase to $314K, saving me $144 each month. The closing costs are only $1100. Eventually, I want to switch from my FHA to a conventional loan to eliminate PMI, but I don’t yet have 20% equity. I have made significant upgrades to my home, including a new roof, HVAC system, kitchen, deck, and bathrooms, and replaced the tile flooring with hardwood. For these upgrades to allow a conventional refinance and remove PMI, they would need to increase my home’s value by $60k. Should I wait to attempt a conventional loan refinance, or should I lock in the lower rate now? I should mention that refinancing would also mean not paying two months of mortgage, saving $5800, as most of my current payments go towards interest.
Just remember they are including what seems like closing costs and escrow. To accurately calculate your true break-even, consider the payment difference divided by all non-escrow costs. Just to get your principal balance back to its current level would take over 40 months, not the 10 months you estimated.
@Mai
Actually, with an FHA streamline, the only thing that can be rolled in is the UFMIP fee, which is 1.75% of the loan amount. You should also receive a partial UFMIP refund depending on the time since your last closing.
@Davi
Even if it’s just the UFMIP, it still affects your break-even calculation since it is indeed a fee.
Mai said:
@Davi
Even if it’s just the UFMIP, it still affects your break-even calculation since it is indeed a fee.
Absolutely
Considering the figures you’ve provided, your break-even period is much longer than 10 months. That’s only for your out-of-pocket expenses, not the total cost. By adding $6k to your principal, the break-even is closer to 50 months. That’s a deal-breaker for me. Anything longer than two years doesn’t seem like a good investment, which I’ve advised clients for over 15 years.
@Blake
I’m also not making two mortgage payments during the refinancing, which totals $5800, primarily interest payments.
Frey said:
@Blake
I’m also not making two mortgage payments during the refinancing, which totals $5800, primarily interest payments.
It’s important to remember that you’re still accruing interest. Skipping payments doesn’t mean you’re not incurring costs; you’re just not building equity. Those skipped payments and their interest are added to your new loan, increasing your debt. Ideally, you should apply those ‘saved’ funds to your new mortgage to reduce the principal. But in reality, few do this. In a few months, the $144 monthly savings won’t seem significant, yet you’ll owe more on your home. My advice remains to reconsider this refinance.
@Blake
So if I apply the saved payments to the principal, my original 10-month break-even estimate holds, right? With the new loan at $314K versus the old at $308K, adding the $5800 leaves me with just over $1300 in combined costs and savings to recoup.
@Frey
Even with that adjustment, it’s still not a great deal.
@Blake
I always suggest the two-year rule for major investments and purchases, which has served me well over the years.
Here’s a quick breakdown: $314,000 new balance minus $308,000 old balance equals $6,000 for refinancing. This is likely for the new FHA UFMIP and closing costs. If they set up a new escrow, you should get your current escrow balance back, so that’s a neutral change. Dividing the $6,000 cost by the $144 monthly savings gives a 53-month break-even point.
@Azar
The UFMIP can be partially refunded. It’s also likely that some of the costs are prepaid, which you’ll get back when your current mortgage is paid off. This means your actual costs might be around $3,000, making your break-even closer to 27 months, which is more reasonable.
@Azar
But remember, not making two mortgage payments saves me $5800 right now.
Frey said:
@Azar
But remember, not making two mortgage payments saves me $5800 right now.
Those savings will ultimately be paid back over the life of the new loan. Consider both the UFMIP refund and your escrow refund when evaluating this deal. It technically meets the FHA’s benefit guidelines, so it’s up to you to decide based on your financial goals.
@Azar
I need to look up the specific guidelines, but the bulk of the increase in my principal is essentially the interest I would have paid anyway. I’ve confirmed this with the loan officer. Applying the savings to the principal does bring me to a 10-month break-even point. I’m still trying to grasp all this, so thanks for bearing with me.
Refinancing usually makes sense if you can lower your rate by at least one full percentage point and plan to stay in your home for at least five more years.
Why is your loan balance increasing? Also, consider waiting until summer to refinance, as property values may increase then due to comparable sales in your area.
Niko said:
Why is your loan balance increasing? Also, consider waiting until summer to refinance, as property values may increase then due to comparable sales in your area.
If there are no-cost refinancing options available every six months, why not refinance now and then again later if rates drop further?
@Bao
That’s an interesting approach, but I’m curious how one could repeatedly secure no-cost refinancing offers, especially at lower rates each time.