Should I Refinance to Remove PMI?

Mortgage balance: $265k
Loan type: FHA
Current rate: 2.85%
Property value: $400k

I purchased my home during the COVID boom and now use it as a rental property while I live in a new home. The mortgage is around $1900 (including taxes, interest, and principal) and the rental income is $2300. I’m considering refinancing to remove PMI and possibly take out $20-30k for a down payment on a new primary residence, as my family is growing. Would this be a good idea?

Unless you really need the cash, I wouldn’t refinance. Keeping your 2.85% mortgage, even with PMI, is a better option. Doing a cash-out refi will likely raise your interest rate more than a standard refi would.

PMI on an FHA loan never goes away, but it does decrease annually as your principal balance reduces. Given your current rate of 2.85%, I would recommend keeping it. Refinancing isn’t a good idea in my opinion.

If you’re looking to do a 75% cash-out on a rental property, your new rate could be around 7.5% with a monthly payment of about $2123 for principal and interest. Add taxes and insurance, and you might net around $30k.

Consider asking your lender to drop PMI due to the increased home value. You could also take out a separate loan with a higher rate but smaller loan amount, so your total monthly payment may be lower than refinancing the entire mortgage.

@Cairo
I’ve heard that you can’t drop PMI with an FHA loan, unfortunately.

Blaine said:
@Cairo
I’ve heard that you can’t drop PMI with an FHA loan, unfortunately.

Yes, PMI removal rules changed after 2013, and now you need to refinance to remove it.

PMI will eventually come off after 11 years if you put down 10%. Your MIP rate is likely around 0.8%, so refinancing doesn’t seem like a good idea.

If this is an investment property, you might be able to deduct PMI and interest on your taxes.

Zia said:
If this is an investment property, you might be able to deduct PMI and interest on your taxes.

Yes, I do write it off on my taxes.

If you’re considering refinancing, I would recommend getting a new loan at around 7%. It might be a better financial move.