topic Re: Rate vs Loan + Financing UFMIP in Mortgage Loans

Rate vs Loan + Financing UFMIP

Anonymous — Wed, 28 Jan 2015 00:34:08 GMT

Hi there,

I have a question. I am looking at FHA financing and looking to get a 5/1 arm so at year 2 or 3 I can refi out of the FHA to a conventional loan once the LTV hits 80% by me paying the mortgage down plus the values going up in the area I’m purchasing (Dublin, California).

The question I have is about the upfront mortgage insurance premium. There are a few ways to pay this.

Pay cash out of pocket if you have the cash.
Roll it into the loan amount
Increase the interest rate just enough to get a lender credit amount (credit you get for increasing the interest rate) to cover the UFMIP.

What are the Pro’s and Cons of 2 and 3 from above?

Thank you,

Cali_Man4545

Re: Rate vs Loan + Financing UFMIP

Anonymous — Wed, 28 Jan 2015 18:31:09 GMT

One Pro I can see with 3 is that If at end of year 2 I can refi out of an FHA and the value is up enough to get me 80% LTV I can stop paying back the UFMIP and the monthly MIP earlier.

Are there any Pro's from option 2?

Any thoughts?

Re: Rate vs Loan + Financing UFMIP

Revelate — Wed, 28 Jan 2015 18:50:09 GMT

@Anonymous wrote:
One Pro I can see with 3 is that If at end of year 2 I can refi out of an FHA and the value is up enough to get me 80% LTV I can stop paying back the UFMIP and the monthly MIP earlier.

Are there any Pro's from option 2?

Any thoughts?

In my opinion comes down go which costs you more: additional loan balance at rate, or smaller loan balance at higher rate when the MIP is added.

FWIW if that's a wash I'd pick the higher rate: as you suggest rates can change and a refi might be in the cards (though rates are awfully low now) or just prepay the loan, but that loan amount is fixed short of paying it.

Re: Rate vs Loan + Financing UFMIP

Anonymous — Wed, 28 Jan 2015 20:29:13 GMT

Payments seem to be around the same, I just see more advantages by going with option 3 and don't know what the advantages of 2? Trying to figure that out.

Re: Rate vs Loan + Financing UFMIP

Anonymous — Wed, 28 Jan 2015 22:36:49 GMT

Housing prices has pretty much flatline, especially in Dublin with all the new constructions they have. You better hope we don't have a crash again as you will be stuck in a situation where you can't refi due to the upside down market (I was there in 2010). Plan wisely

Re: Rate vs Loan + Financing UFMIP

Anonymous — Wed, 28 Jan 2015 22:52:45 GMT

Got it it's a tough decision as I don't know how the values are determined, I heard there is a cycle can anyone elaborate on that? The FHA 5/1 arm has a 1% cap every year if that makes a difference?

Re: Rate vs Loan + Financing UFMIP

Anonymous — Thu, 29 Jan 2015 09:25:09 GMT

You are at or near the peak, prices aren't going to jump up 10% within a year. This is how everyone got into trouble last time, primary residence should be viewed as a home and not a piggy bank. With historic low rates, you should only be using ARM when you have more income coming in the futre or you know you will move before the adjustment period

Dublin is a nice place to live, but you guys have the most supplies of good home in the area. You will never get the international investors having bidding wars on your home

Re: Rate vs Loan + Financing UFMIP

MrChairman — Thu, 29 Jan 2015 10:58:25 GMT

An ARM with rates in the low 3's?! You seem to be banking on a rising housing value. Sounds like too much risk for me. If you can't afford a 30 yr fixed with the PMI now, you may need to save up some more money. That ARM will get you in trouble if you're looking to gamble on your house shooting up by 10% in one year and rates staying where they are. I doubt rates will be 3 or 4 anything by the time you go to refi your ARM.

Re: Rate vs Loan + Financing UFMIP

StartingOver10 — Thu, 29 Jan 2015 14:46:00 GMT

@Anonymous wrote:
Hi there,

I have a question. I am looking at FHA financing and looking to get a 5/1 arm so at year 2 or 3 I can refi out of the FHA to a conventional loan once the LTV hits 80% by me paying the mortgage down plus the values going up in the area I’m purchasing (Dublin, California).

The question I have is about the upfront mortgage insurance premium. There are a few ways to pay this.

Pay cash out of pocket if you have the cash.
Roll it into the loan amount
Increase the interest rate just enough to get a lender credit amount (credit you get for increasing the interest rate) to cover the UFMIP.

What are the Pro’s and Cons of 2 and 3 from above?

Thank you,
Cali_Man4545

To me it makes more since to not bump the interest rate to pay your UFMIP (option 3). It makes more since to go with Option 2 if you don't have the funds to pay the UFMIP at closing.

My reasoning is this: the lender has to bump the rate on the entire loan in order to get the funds to pay the UFMIP and that increased rate is for the life of the loan - even on an arm. The lender can bump the rate by changing the margin too - not by changing the index, but the margin is what can make or break an ARM (as well as the index).Sorry, no pun intended...

If you roll the UFMIP into the loan you are only paying your note rate on the increased amount of the principal balance.

As to selecting an ARM or fixed rate mortgage, a lot depends on how long you will be in the property as pointed out above. If you plan to sell or move prior to reset, then selecting the ARM is a no brainer. Except that life frequently interferes and you may end of moving later than you planned. An ARM inherently has more risks for you, the borrower, but those risks are moderated by the annual caps and lifetime caps. Check your index and your margin so you can weigh worst case senerios.

If in fact you are in a market where the housing prices are nearly flat like some of the posts suggests, then you would be better off with a fixed rate loan unless you plan to make large principal payments to your mortgage during the initial low interest rate period of the ARM. Be realistic with your budget and do the math to see what you would need to do to pay down your mortgage in the initial period to refi to a conventional loan with an assumption of zero growth in appreciation.

Another option is to put down 10% on your purchase and either go with conventional now - or with a FHA mortgage where the MIP will drop off in 11 years. That way you don't have to refinace at all.