Should you refinance to remove mortgage insurance even if you cannot lower your mortgage rate? I am considering refinancing to eliminate my mortgage insurance but my interest rate and loan balance may increase.
The answer to your question depends on if you are paying private mortgage insurance (PMI) or FHA mortgage insurance premium (MIP) as well as your current mortgage rate and loan-to-value ratio. If you are paying PMI and you are able to lower your mortgage rate, then you should refinance. Refinancing your mortgage at a lower interest rate plus eliminating PMI should significantly reduce your monthly mortgage payment and save you money, as long as your mortgage balance stays the same.
If you are paying PMI but you are not able to lower your mortgage rate by refinancing, then you should not refinance but you should request to have the PMI removed if your loan-to-value (LTV) ratio is less than 80%. In this scenario, your monthly payment decreases because you are no longer paying PMI but you do not incur the closing costs associated with refinancing. We provide a comprehensive overview of PMI and how to have PMI removed on FREEandCLEAR for you to review.
The analysis is a little different for FHA loans because if you are paying FHA MIP, you are required to pay MIP over the life of your loan, regardless of your LTV ratio. In this case it may make sense for you to refinance your mortgage to remove the MIP even if you pay a slightly higher mortgage rate. The decision to refinance depends on your new mortgage rate and monthly payment, excluding the FHA MIP, and how long it takes you to break even, or recover your closing costs. A good rule of thumb is that you should break even within six months of refinancing. For example, if you pay $1,800 in closing costs, you should save at least $300 per month on your new mortgage payment to justify the cost of refinancing.
You should compare your new mortgage payment to your old payment including the FHA MIP to determine if you can save money by refinancing. If you can lower your mortgage rate and eliminate the MIP then refinancing likely makes good financial sense. Even if you cannot reduce your mortgage rate, it may still be a good idea to refinance if your monthly MIP is greater than the payment increase associated with a higher mortgage rate. For example, if your current mortgage payment is $2,000 and you pay $200 in FHA MIP, so your total monthly payment is $2,200, and your new mortgage payment is $2,100 but you no longer pay MIP, it may make sense to refinance depending on your closing costs.
Additionally, we typically do not recommend that borrowers increase their mortgage balance significantly when they refinance so you may want to consider paying your closing costs out of pocket instead of adding them to your loan amount. Or you could also consider a no-cost refinance. With a no-cost refinance you pay no closing costs but you pay a higher mortgage rate. Depending on your mortgage rate and monthly payment, however, a no-cost refinance may make sense for you. You can use our refinance calculator to evaluate different refinance scenarios and determine the approach that is right for you.
Also, please note that if you have any funds remaining in your impound (or escrow) account on your current mortgage, you may be able to apply those funds to your closing costs on your new mortgage.
We always recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area by clicking INTEREST RATES We advise you to contact at least four lenders as as qualification guidelines vary. Plus, shopping lenders is the best way to save money on your mortgage. You can also use our Free Personalized Mortgage Quote function to receive no obligation mortgage quotes from up to four lenders.
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