Let’s say you purchased a home in Mission Viejo, CA in the summer of 2013 for $659,000 and got a 30 year fixed FHA with a 3.625% interest rate. That sounds great so far but it was done using FHA which comes with PMI. The borrower only put down 3.5% and has to pay $677 every month for FHA’s mortgage insurance premium (MIP). Now for the good news. The home has increased in value by 20% in the last 18 months. Since an FHA refinance will not remove the MIP anytime soon, the other option is to refinance into a regular conventional loan at today’s rates which are higher than what the homeowner has currently, 4.375% interest rate, yet it does not have any PMI. Will the homeowner be saving or losing money this way? Here are some great answers:
Yes – be free from PMI since your PMI payment is not tax deductible while the interest on your loan is tax deductible. Even though your new interest rate is higher, your tax deduction is also higher.
Even at a higher interest rate you would save slightly over $400.00 each month. Moreover, if the extra $400 dollars a month is not something you want to save or invest, simply apply it to your new mortgage payments principal which will reduce your loan term by 6 to 7 years.
According to the new FHA rule, borrowers have to keep their FHA MI for the first eleven years, no matter what. If you want to know how much you’ll save, just multiply $406, the overall monthly savings, by 121 months, it will give the amount of $49,126. This is only applies to the first eleven years.
With today’s low interest rates, you may find a no points and no closing costs conventional 30 year fixed rate of 4.375% so that would mean the APR is 4.375%, as well. Therefore, you start saving from the day after you close.
If you really think you’ll be relocating elsewhere in 5 to 7 years, it’s worth considering a 7 or 10 year ARM loan which tend to have lower rates than a 30-year fixed. Monthly savings will increase with refinance rates lower than the example above.
So, to summarize, you’ll save around $400 a month and you’ll have a larger tax deduction the following year which potentially saves you even more money. Always consult a certified tax professional when it comes to your income taxes.