Should I refi for a slightly higher interest rate without Mortgage Insurance?
Based on numbers alone, it might seem counterintuitive to refinance into a higher interest rate. Higher interest means higher payments, right? Not necessarily.
There are some cases in which a higher-interest refi makes perfect financial sense. Carrying mortgage insurance (MI) is one of those cases. Though refinancing to get rid of MI might increase your interest rate, doing so could also reduce the total amount you’re borrowing, thereby lowering your payments. Think of it this way: interest rate + MI = total cost. Take MI out of the equation, and your total cost will likely be lower, even with a slightly higher interest rate.
The Total Costs of Home Ownership
Every homeowner knows that you spend more on your house than mortgage expenses alone. The final closing cost itself is only part of the financial puzzle of homeownership. Things like property taxes, insurance, HOA fees and other expenses need to be factored into any consideration of how much you’re paying for your home.
For some homeowners, MI is yet another expense to factor into their consideration of total cost. If this sounds familiar, know that you aren’t stuck with MI forever—refinancing is one way to drop it for good.
Understanding Mortgage Insurance
Mortgage insurance isn’t a bad thing— it actually helps people buy homes. Most home loans require buyers to make a 20% down payment, though FHA and USDA loans have a 10% down payment requirement. Either way, you aren’t out of luck if you can’t afford that much of a down payment. Thats where MI comes in.
MI is designed to provide coverage for lenders in the event that a borrower defaults on their home loan. That’s why lenders are willing to take the risk of working with those who can’t afford the standard 10% or 20% down payment. You agree to pay for the insurance, and they agree to give you a loan.
Though MI is helpful in allowing you to own a home when you don’t have substantial savings, it isn’t very financially beneficial in the long term. MI payments add up over time, and they don’t help you build equity or reap any other financial reward. Every MI payment is money you could be spending on something else, so you’ll want to drop it as soon as possible.
Refinancing isn’t the only way to get rid of MI. If you have a conventional loan, you can get rid of MI if you pay on time for a minimum of two years and have built up 20% equity in your home.
The rules are different for FHA and USDA loans. If you put less than 10% down on an FHA loan, refinancing is your only way to get rid of MI. For those who put down 10% or more on an FHA loan, the MI will expire after 11 years. MI accompanies USDA loans for the loan’s lifetime and you would need to refi to a different loan product to remove it.
The fact that MI doesn’t last forever is good news. However, if you are in a financial position to refinance, you don’t need to wait for the conditions listed above to come into effect. You can drop your MI much sooner with a refi.
Thinking Big Picture
It’s important to think about the big picture when you consider refinancing. Don’t just assume that a higher interest rate is automatically a bad thing—if it allows you to drop your mortgage insurance, it could actually be a net positive.
Remember that it’s not just the interest rate you need to think about, but the total cost of the money tied up in your loan. When you think about your current monthly mortgage payments, don’t leave out your MI fees. They’re a part of the loan. Even if your current mortgage has a favorably low interest rate, the additional cost associated with MI payments might be taking a substantial bite out of your monthly budget.
It could be that refinancing with a slightly higher interest rate and no MI would leave you in better financial health. You might actually lower your monthly payment, which would leave you with more budget room to save, invest or pay down bad debt.
There are other benefits to consider as well. Refinancing could allow you to shorten the term of your mortgage, or remove co-borrowers (parents, ex-spouses) you no longer want associated with your loan. It may also be possible to build home improvement costs into your refi. Additionally, you could switch from a variable-rate ARM to a fixed-rate mortgage. Even if the refi rate is a bit higher, fixing that rate and keeping your payments steady can be a smart move.
Making the Right Choice
These are all important things to think about, but ultimately, you should only refinance if you’re certain that it’s the smartest financial decision available to you. You’ll want to keep an open mind and crunch the numbers as you approach the idea of a refi. Make sure you can find new loan terms that are favorable—simply getting rid of MI payments shouldn’t necessarily be the goal. Rather, your goal should be to lower your total monthly housing expenses.
But remember that you don’t have to go it alone when making your decision. A qualified mortgage specialist can make it much easier to navigate this complex calculation.
Finding the Right Loan
Directors Mortgage is here to help you figure out whether refinancing is the right decision. If, after discussing the details with your mortgage specialist, you decide to move ahead with a refi, we can structure a loan to fit your needs. With Directors Mortgage at your side, you’ll be able to learn important information, weigh your options and move forward on the right path to a better financial future.
Grab your last mortgage statement and call your local Directors Mortgage Senior Mortgage Specialist today. Does refinancing make sense for you? Let’s find out!