Home > To refinance or not to refinance. That is the question.

To refinance or not to refinance. That is the question.

April 14th, 2009 at 09:14 pm

I need some advice about whether or not refinancing would be a good idea. We currently have a 30 yr fixed FHA loan with an interest rate of 6%. The balance we owe is $126,915.43. Our principal and interest payment is $814.24 and our PMI is currently $52.35 monthly. Our escrow (taxes and insurance is $413.36 monthly) According to the Central Appraisal District of my county, the value of our house is $145,393. I believe that would give us a loan to value ratio of 87%. I know that mortgages with a loan to value ratio of 80% require PMI.

I called my lender (Wells Fargo) and inquired about a FHA streamline refinance. They told me that there is no appraisal required and no pulling of credit required for a streamline refinance.

They offered me two options for a 30 year fixed refinance. The first one is a 5% interest rate with 1/2 of a point. There would be closing costs of about $3,500 rolled into the loan. The second one is a 4.875% interest rate but we would pay $4,200 out of pocket for closing costs.

I don't want to pay anything out of pocket so we are looking at the 5% one. With this the principal and interest would be $722 a month and PMI would be $54 a month. The quoted me a monthly payment of $1,162.00 including escrow.

They also told me that we have an escrow shortage of $876.00 and our payment will go up in June to $1,324. We are currently paying through escrow $66 a month for insurance and $264 a month for taxes. In June, insurance will increase to $73 and taxes will increase to $311.

The total new 30 year loan would be for $134,507 and would include upfront FHA insurance, the loan payoff and closing costs.

All of this information has my head spinning and I am not sure if refinancing would be the best option for us.

We are following the Dave Ramsey plan and just finished baby step two this week. We don't know whether it is worth it to refinance for the lower interest rate or if we should just try to keep it as is and pay extra as we can. I also thought about checking into a 15 year FHA refinance to see how the payment would increase with that. With a lower interest rate I am wondering if that would be an option since the payment is not really an issue.

Also, it was asked in the comments how long we've been in the house. We've been here almost five years. We closed in June of 2004. Smile

Any advice y'all could give is sincerely appreciated.

7 Responses to “To refinance or not to refinance. That is the question. ”

  1. creditcardfree Says:

    I just went through this debate with my sister. She actually decided NOT to refinance. Her loan would have gone from 6.5% to 5%, with about $4000 in closing costs added to the new loan. Because they did the appraisal already they will be getting rid of PMI for sure, saving them about $60/mo. They decided not to because they could have about $40K in credit cards paid of in just over two years and finish paying the house off in another 4 years. The numbers just didn't work in their favor.

    My gut says you won't save enough per month to offset the increase in the principal of the loan. You are adding $7600 to the loan and saving $162/mo if I read the numbers right. It will take you nearly 47 months or almost 4 years to just break even.

    I don't think I would do it. But that's me.

  2. monkeymama Says:

    It depends how much time you have left on your current loan. How much time?

  3. Elly Says:

    We've been in the house since June of 2004. I will add that to my entry. Thanks!!

  4. creditcardfree Says:

    Do you know that you will be in your house for quite some time?

  5. Elly Says:

    I think we will be here for a while. I'd say at least 8-10 more years.

  6. creditcardfree Says:

    It might be worth it for that long...unless you can pay off the loan sooner than that, which is the case with my sister. A better scenario would be if you could pay the closing costs out of pocket.

    We have a 6% mortgage, but we will probably move in 2 it doesn't make financial sense for us to refinance.

  7. monkeymama Says:

    This was my thought process with my last refi. I am extremely conservative though. We had never borrowed for a refi before (& we have refied quite a few times - our first loan was 8%+ in 1999 - each refi was worth it). I decided it was worth it if we could resume our old payments and shorten the loan. In the end, we would be saving money, costs considered. That being said, we plan to be here forever. & I KNOW this is our last refi ever. (I'll take the risk if rates go below 4% or something. Would be quite an anomaly).

    Anyway, running the numbers, if you contine your old payments (paying $814 per month) on the new mortgage, you would pay off your house in 2032. 22 years. So you shave 2 years off your existing loan. I didn't consider PMI or escrow since those would be the same regardless. If you live in the house 10 years it is long enough to justify the costs as well.

    In general, being able to lower your house payment by 10% for the next decade is not a bad deal. I'd be wary if you weren't on the Dave Ramsey plan or if rates weren't historically low. But if you are committing to pay down your debts and this will probably be your last opportunity to refi to a better rate, I say go for it. (BTW, I also assume you are rather young).

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