 Considering a refinance of FHA mortgage
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 Dear
Dr. Don,
Our mortgage is a FHA 20-year fixed rate loan at 5.625 percent.
We are considering a home equity loan for $20,000 to pay off our
credit card debts, but the loan officer has recommended that we
refinance the mortgage instead. He claims that even though the interest
rate is higher; it evens out because we will not pay PMI. What do
you think?
-- Rosa Restructures
 Dear
Rosa,
FHA loans don't require private mortgage insurance, or PMI, although
there is a mortgage insurance premium, or MIP, that you pay for
the government guarantee on an FHA mortgage. The MIP is an upfront
cost paid at closing. Depending on the size of your down payment,
there may also be a monthly premium payment. If you bought the house
with less than 10 percent down, you'll pay a monthly insurance payment
of 0.005 percent, too. For a $100,000 loan that monthly insurance
payment is $100,000 x 0.005/12 = $41.67.
Paying off your mortgage early might entitle you to
a partial refund of the upfront payment and would get you out from
under a monthly premium payment. A HUD
fact sheet can help you determine if you would get a MIP refund
if you refinanced your FHA mortgage. So the first step is to figure
out if you're paying the monthly insurance premium on your FHA loan
and, if you are, how much you're paying each month.
Since the monthly MIP is expressed as an interest
rate (0.5 percent), you can add it to your loan rate of 5.625 for
an estimate of where you'd need to be for the lender to be correct
about things evening out. If he's offering a fixed-rate APR of 6.125
percent then you're in the ballpark for refinancing. Since Bankrate's
national average for a 30-year fixed rate is 6.46 percent, and a
15-year is at 6.16 percent, that's not all that likely.
These rate quotes bring up another important consideration.
You've got a 20-year mortgage. I don't know how many years into
this mortgage you are, but to put refinancing on an apples-to-apples
basis, you should be looking at refinancing with a 15-year note,
not a 30-year note.
Another thing. Even though you're restructuring your credit card
debt at a lower interest rate, you can wind up paying more in interest
expense because you're taking 15 years to pay it off.
One more problem with refinancing versus just taking
out a home equity line of credit or home equity loan is that the
closing costs are a lot more expensive when you refinance. You can
use Bankrate's refinancing
calculator to determine how long it would take you to recoup
the financing costs.
Your lender would have to be offering you a very attractive rate
on the refinancing to have it make sense versus staying in your
current FHA loan and restructuring your credit card debt with a
home equity line or loan.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "financing
a home," "saving & investing" or "money."
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