Getting into a home with just 3.5% is truly using leverage to your advantage. And doing that in a high-cost competitive market like L.A. or Orange County, CA is even more advantageous depending on what type of market cycle you are in, a buyers or seller’s market. However, with a low down payment comes mortgage insurance (MI or MIP for FHA) to protect the lender’s interest in the property. The home buyer is hoping for appreciation to be in a position that MI is not necessary.
Here’s how we helped a homeowner save more money per month.
Example: Borrower has a high-balance $723K FHA home loan that started in July, 2013 with a payment of $3,348/month. They purchased the home for $750,000. Their interest rate is excellent at 3.75%, but the homeowner has to pay $753 a month extra for MIP. This extra expense is a becoming a nagging problem so the borrower is determined to get rid of it before five years is up.
Prior to June, 2013 “mortgage insurance” on an FHA loan was mandatory for no less than 60 months along with the property appreciating to reach a loan to value of 78%. Nowadays, the new rules call for MI on an FHA loan to be permanent for the life of the loan, so refinancing is the only way to go.
By using our 90% LTV loan without mortgage insurance either using a first and second combo or one 90% loan, the new payment makes financial sense. If you think your home has increased in value by another 7.5% bringing your equity total to 11% (7.5% + 3.5% initial down payment) and you’re planning to stay in the home for at least 4-5 more years, refinancing may make sens even if rates are higher. Let’s look at the what would happen today.
Orig. Purchase Price: $750,000
Initial Loan amount: $723,500
Principal & Interest: $3,348
Monthly MIP: $753
New Loan Options:
Property’s loan to value has decreased to 90% which puts the value at $825,000
1.) First & second combo: 1st mortgage at $625,500 at 4.75% = $3263 and 2nd at $98,000 at 5.75% HELOC I/O = $469 –
Total monthly payment = $3,732
Savings of $369 per month ( multiply it by 5 years it is $22,140 )
2.) 90% LTV single loan (MI included in rate): 1st mortgage at $723,500 at 5.50% (10/1 ARM) = $4,107
Looking at both options, Option #1 is the best choice as the second option only is minutely higher payment. Entertaining the idea of refinancing to a conventional loan from an FHA is a pretty smart move…it’s worth looking at the numbers to see if it makes sense. As we have demonstrated, a combination loan is a fantastic solution to get around paying mortgage insurance.
Something else you should know is that conventional loans have decreasing MI criteria as the loan to value drops. For example, MI for 85% LTV will be less than 90% LTV, and so on. Additionally, the ability to remove it is far easier and faster than the govt. insured FHA process.
With the savings you put that extra money (or some of it) into other investments (stocks, mutual funds, IRAs), your kids college tuition, use it for your business, buy a car, etc.
If you think you fit into one of these scenarios, contact us for details & start saving money in 30 days!