Recently (01-26-2015) the FHA lowered the monthly insurance premiums by 0.5%. The change does not apply retroactively. Sorry!
The news got a lot of homeowners wanting to refinance so they could lower their expenses.
And a lot of mortgage companies (or, anyway, Chicago mortgage companies) to send out postcards and letters to FHA mortgage holders encouraging them, all of them, no matter what their situation, to refinance their loan.
I assume, the idea was to get as many people in and sort out the ones for whom it makes sense to refinance.
But it got a lot of borrowers who would not benefit from the lower MIP (monthly insurance premium) excited.
Who Benefits From the Lower MIP?
One of the things that the postcards mortgage companies sent out forgot to mention is that people getting FHA loans after June 30, 2013 have to pay mortgage insurance for the life of the loan or 11 years, whichever is longer.
Prior to June 30, 2013, if you had a 30-year FHA loan, you could stop paying mortgage insurance as soon as your equity reached 22% (put another way, when the LTV (loan-to-value ratio) dropped to 78%.
Another thing they forgot to mention is that the new refi comes with closing costs. I know, I know. People should know that every time they take out a mortgage loan, they have to pay. But they don’t know how much.
Am I Making Too Much of What Mortgage Companies Forget to Mention?
Obviously, I don’t think so.
Not because it takes a short time to get to 78% by making the minimum monthly payments, but because making the minimum payments combined with home value increases have put many FHA loan holders close to being done with the monthly insurance.
If you bought a house in Niles, IL for $155,000 in October 2011 with a 3.5% down payment, your loan amount (with the upfront mortgage insurance premium) rolled into it, was a bit more than $152,156. In the Chicago area, values have increased significantly since 2010, some years as much as 10% a year.
Today, that house is worth about $190,000. Seventy-eight percent of $190,000 is $148,200. (According to Zillow.com, Niles home values went up 22% from December 2011 till today (03-27-15). Making the minimum monthly payments would have gotten you to owing $148,200 in 22 months, that is to say, at the end of 2013.
Refinancing now to lower your mortgage insurance premium makes no sense.
If you’re in an area where property values didn’t go up so fast but did go up, the contrast is not so drastic. Or you bought your home at the end of 2012 (so your home value increased only But you too could be done or nearly done with paying mortgage insurance shortly. So, why get a mortgage loan that will have mortgage insurance premiums for at least 10 years?
Should You Refinance Your FHA Loan?
So, should you refinance? Yes, if you’re refinancing for reasons other than to lower your monthly payment by lowering your mortgage insurance premium.