iHeartBudgets

To refinance, or to not refinance…?

I listen to talk radio. In fact, I rarely listen to music (which is funny for a guy who got an audio degree). And one thing I noticed is the commercials on talk radio stations seem to be much more sophisticated than those on the Top 40 radio stations. Here’s an example; I was listening to a music station for some reason (probably because there was a story on the talk station about a stupid celebrity doing something stupid again), and the first commercial that came on was for a company that staffs lawyers specifically to help clean up your troubles after getting a DUI (or multiple DUI’s, which apparently these people are experts at). Awesome. They are assuming if I listen to Top 40 constantly that I will drink heavily because of all the mind-numbingly bad music and end up getting a DUI. I flip back to the talk radio station and there’s a commercial from the radio host talking about how he’s refinanced his mortgage 4,300 times and has THE BEST RATE IN THE HISTORY OF POSSIBILITY! They pitch it hard, telling me to get in now, or I might lose out on these historically low rates! And though I usually want to crash the car right then due to the abysmal writing and acting for these commercials, I realized that they may be right about this one. Time to call the 800 number.

Our Home

We bought our house in 2010, and got a decent (at the time) 5% interest rate on our mortgage. We were happy with the rate, and haven’t really thought about refinancing because it probably wouldn’t be worth the hassle. Honestly, it has just been a bit of laziness on my part to not do the research and find this out. Something about listening to the same radio ad 1,423 times in a week got me motivated enough to make a phone call to the Re-Fi company and see if I could benefit at all.

Increased MIP

I chatted with the friendly fellow on the other line for a while, explaining my situation. We have a $313,000 FHA mortgage at 5% interest rate, and are paying a Mortgage Insurance Premium (or MIP). Our house does NOT have anywhere near 20% equity (probably more like 0%), and we were looking to see if we could save any money by refinancing our mortgage. He asked me what I was currently paying for MIP, and I could not find it on my monthly statements. So we reverse-calculated the costs of taxes and insurance, and found that I was paying roughly $145 a month for MIP.

He let me know that the government changed the MIP rate TWICE for FHA mortgages since we bought our home, and no, it didn’t go down (it’s the government, why would it). After punching in a few numbers, he stated that not only would our MIP go from $145 to (OMG!) $325 a month, but we would also have to add $5,477 to our mortgage as part of the capitalized up-front MIP cost. So we’d be paying interest on that. WOOHOO!  After calculating the “savings” from lowering our interest rate for 5% to 3.75%, we only had the potential to save about $50 a month ($231 interest savings minus the $180 increase in MIP).

But, we should also note the “loan origination fee” for refinancing our mortgage is typically about 1% of the total mortgage, so that’s $3,000 up front cash. Plus, another $400 to get the home appraised to make sure we’re not over the maximum LTV (loan-to-value) range for the refinance. SUPER! Not to mention, our “5 year MIP term” resets upon refinance, which means we’re stuck with this MIP payment for another 5 years, minimum.

The Wash

Taking all these factors into consideration, let’s look at the potential savings. We’re at $50 savings a month, times 5 years, which puts us at a $3,000 savings. Ok, so we’ve wiped out the origination fee. Assuming that we’re at 78% LTV at that point, we can kick the PMI, and go back to the $231 savings. Another 2 months, and we’ve knocked out the appraisal fee. So, it looks like if we plan on staying here another 5 years and two months, we can break even. BUT WAIT! You forgot about the up-front MIP cost. OH NOES! That’s another $5,477 that was tacked onto the principal and interest has been charged on that amount for the last 5 years. So, $5,477 x 3.75% x 5 years = over $1,000 in additional interest. So, to ACTUALLY BREAK EVEN, we would need to be in our home for roughly 3 more years. And this doesn’t even take into account that our MIP would disappear much sooner if we DON’T Re-Fi.

Conclusion

So, taking all of these factors into consideration, we have decided that it’s not worth the hassle to try and refinance our home. We would have to go through some kind of streamline Re-Fi process because of our lack of home equity, it would drag on forever, and we would burn WAY too much time on this for almost no return on investment, even if we stay here for 8 more years. Since we plan on moving about that point, it would be pointless and a waste of time to pursue a home refinance right now.

Comments: What are your thoughts? Is there anything I missed here? If you were in my shoes, what would you do? Would you refinance our home? Sell it? Light the thing on fire and collect the insurance money?