Should I Refinance to Remove PMI?

Seeking Advice
1

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?

2

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.

3

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.

4

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.

5

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.

6

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

7

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.

8

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.

9

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

10

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.

11

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