Many people just couldn’t afford or get a conventional loan. If you don’t have 10 or 20 percent down, it can be quite hard to get that conventional loan without an impressive credit score or amazing income.
So, a large chunk of home buyers opted for FHA despite high mortgage insurance premiums that get tacked on upfront and during the entire course of the loan. The only way out of those high insurance costs is to refinance or sell the house.
After a few years of paying those insurance premiums, homeowners are having great success refinancing into a conventional loan to get rid of FHA mortgage insurance.
Matt Perillie, sales manager at Campbell Mortgage in North Haven, Conn., says that people should be aware that as of this past January, FHA lowered the mortgage insurance rates on all newly originated loans to .85 percent from 1.35 percent on 30-year fixed mortgages. On a $200,000 mortgage, the new payment will be $133 as opposed to $225 per month. That’s a big change, but there are still FHA upfront mortgage insurance costs, too, to think about.
Here are a couple people who were able to refinance to conventional loans and eliminate the cost of their FHA mortgage insurance altogether.
Saving $500 a month on FHA mortgage insurance
Kelsey Corcoran-Galarza, a senior director of marketing for a tech company in Orange County, Calif., was frustrated with mortgage insurance ever since she bought a new home four years ago. The three-bedroom, three-bath 2,200 square foot house with large fenced backyard for all her dogs was a perfect choice for her. But that $500 a month mortgage insurance tormented her.
“I refinanced to a terrific rate about 18 months in, but it was still an FHA loan. Despite the fact that our home had appreciated over 30 percent and our loan-to-value ratio was well under 80 percent, our lender would not budget. They required either cash payment or evidence of structural improvements in the amount of over $80,000,” she says.
Fortunately for her, the interest rates dropped, and her family was able to secure a conventional loan at the same rate as they had with an FHA loan but without mortgage insurance. She is married but because of her excellent credit, she took out the loan herself.
“I am refinancing and rolling in some closing costs and other fees for the $583,000 jumbo conventional, 30-year fixed rate loan at 3.875 percent. So for the same exact APR from my refinanced loan and because it’s two years longer and less principal –and minus the stupid mortgage insurance –we’re saving about $500 a month,” she says.
The couple had an original FHA loan for $600,000 with APR at 4 percent and mortgage insurance at $500 a month. When they refinanced to another FHA loan, it was for 3.87 percent for $595,000 and $350 month mortgage insurance.
They are still deciding what to do with that $500 surplus.
“We are trying to decide the next best use of a dollar. If we put about $350 a month more into the mortgage principal, it will save us $80,000 in interest over the 30-year fixed mortgage. But saving to pay cash for our next vacation is an option. We want to be smart with this found money and not just spend it on junk,” Corcoran-Galarza says.
Dropping monthly costs by $227
Perillie recently completed a refinance for a client that had an FHA mortgage he took out two years ago.
“At the time, he borrowed $202,000. His rate was 4.625 percent with a principal and interest payment of $1038.56 and his mortgage insurance was $227.25 a month,” he says.
Because our client used the FHA 203K renovation program and rolled in repair costs to a lackluster property, he was rewarded with instant equity. His home value was $240,000.
When he refinanced to a conventional loan at 3.875 percent, it cost him about $1,600 in closing costs. He borrowed $198,000 and dropped his rate and his mortgage insurance.
“His new principal and interest monthly payment is $931.07, saving him $334.74 per month. It did add two years back on to the end of his loan, but even with that his lifetime savings, assuming he stays with it for 30 years would be $29,000,” Perillie says.
The perfect time to eliminate FHA MIP
Mortgage rates recently dropped to 2015 lows. At the same time, home prices have gone up in most areas of the country.
Homeowners who bought with FHA just a year or two ago have a good chance of refinancing into a conventional loan and removing their FHA MIP.
Verifying your conventional loan eligibility is easy.