Refinance w/DPA - good idea?

[StarraeAday1]

DH and I bought our home in August 2020 using an FHA loan and a Missouri state down payment assistance program that essentially gave us a second mortgage equaling 4% of the purchase price. No payments are due, and if we don't refinance then the balance is forgiven after ten years.

We'll be eligible in February to refinance to a conventional loan due to prior Ch7 BK w/foreclosure. There's a local credit union with a product that doesn't require PMI that seems to have decent interest rates, although I'm not sure what rate we might qualify for in February. Also not sure what our mortgage scores will be in February, but when we bought a year ago they were in the very high 600s-low 700s and we've had no challenges since then. I was hoping for some advice on whether it's likely to be better to hold on to the FHA loan for the duration to achieve forgiveness, or whether it would be better to refi to remove PMI sooner rather than later. I'll list all of the DP'S I can think of, feel free to ask clarifying questions.

Originally financed ~$157k, current balance is ~$154k. Payment is $1140, of which $348 is taxes and insurance and $108 is PMI. Interest rate is 3.25%. DPA loan balance is $6400. Value when we bought was about $160k; it's approximately $180-185k now. The loan product I'm looking at does not require PMI above 80% LTV and has a current advertised rate of 2.875% with no mention of points. We're 40ish and ideally this is our home until we die or can't maintain it anymore.

Can anyone shed some light on whether I should even be considering refinancing, please? Thanks so much!

[VALoanMaster]

---

@StarraeAday1 wrote:

DH and I bought our home in August 2020 using an FHA loan and a Missouri state down payment assistance program that essentially gave us a second mortgage equaling 4% of the purchase price. No payments are due, and if we don't refinance then the balance is forgiven after ten years.

We'll be eligible in February to refinance to a conventional loan due to prior Ch7 BK w/foreclosure. There's a local credit union with a product that doesn't require PMI that seems to have decent interest rates, although I'm not sure what rate we might qualify for in February. Also not sure what our mortgage scores will be in February, but when we bought a year ago they were in the very high 600s-low 700s and we've had no challenges since then. I was hoping for some advice on whether it's likely to be better to hold on to the FHA loan for the duration to achieve forgiveness, or whether it would be better to refi to remove PMI sooner rather than later. I'll list all of the DP'S I can think of, feel free to ask clarifying questions.

Originally financed ~$157k, current balance is ~$154k. Payment is $1140, of which $348 is taxes and insurance and $108 is PMI. Interest rate is 3.25%. DPA loan balance is $6400. Value when we bought was about $160k; it's approximately $180-185k now. The loan product I'm looking at does not require PMI above 80% LTV and has a current advertised rate of 2.875% with no mention of points. We're 40ish and ideally this is our home until we die or can't maintain it anymore.

Can anyone shed some light on whether I should even be considering refinancing, please? Thanks so much!

---

Using the information you provided, here is rough idea of what your refinance would look like.

Current loan amount + the DPA + an estimated $4,000 for closing costs = a new loan amount of $164,400.

$164,400 at 2.875% = a PI payment of $682.08 + $348 for taxes and insurance = a PITI payment of $1,030.08.

Your current payment of $1,140 - the proposed payment of $1030.08 = $109.92 .

Now let's take the costs, including the DPA, and divide that by the monthly savings to find your break even point.

$6,400 + $4,000 = $10,400/$109.92 = 94 months or 7.88 years. 

That does not take into account the skipped mortgage payment or the possible escrow refund.

Does that make sense?

[NC_Mtg_Loaner]

I'd also recommend comparing where you'd be if you take the $ needed for closing costs and if you applied it directly to principal or if you simply placed it in a money market fund where you may feel you can confidently generate an 8% rate of return or more. 

Paying extra principal you'd jump ahead on the amortization schedule and accelerate your equity stake further but those funds you "invest" will be generating a rate of return for you that's equal to your current loan's APR---not to be a Debbie Downer, but it's low----sure, it's nice to have that extra equity though and not to have to pay any interest to gain that additional equity, but just beware your costs in doing so which is the opportunity cost of deferring your equity stake vs. the potential growth of those funds that you'd spend to close that loan. 

Perhaps there's even a happy medium?

[StarraeAday1]

Thank you both for giving me so much to think about!

[CreditFun]

 
current P&I

- proposed P&I 

X 108

- 4% - closing costs + escrow refund +UFMIP refund (if prior loan was fha)

= savings