Homes Appreciated: Have You Considered Refinancing?

By Gustan Cho

Home sales are hot throughout the United States.  Homes in Florida, California, Illinois, Indiana, Wisconsin, Washington and throughout the United States have appreciated double digits in the past 24 months and seems the demand is strong with no indication of a slow down.  Most of my pre-approved mortgage clients are having an extremely hard time finding a property they like and when they do, multi offers and bidding wars is most likely to happen.  With homes appreciating the way they are, many homeowners who purchased their homes in the past few years may qualify to refinance out of their FHA loan into a Conventional Loan and avoid paying the costly FHA mortgage insurance premium.  Even if your home did not appreciate 20%, there are conventional mortgage loan products that offer no private mortgage insurance from the mortgage loan borrower.  It is called the LENDER PAID MORTGAGE INSURANCE, also known as LPMI, and for a slightly higher mortgage rate, the conventional mortgage loan borrower is not required to pay private mortgage insurance.  Not all mortgage lenders offer LPMI but for those that do, it is a great product and can offer a homeowner tens of thousands of dollars of savings over the course of their mortgage loan term.

Why Refinancing Can Help You Save Tons Of Money

Many homeowners went through the ringer when they went through their mortgage loan application process and the last thing they want to even think about is going through the mortgage loan application process all over again.  However, refinancing can help a homeowner save tens of thousands of dollars over the life of their mortgage loan term.  It cannot hurt to get a free, no obligation, cost analysis from a mortgage lender and see what the potential savings may be.  A mortgage lender is highly regulated and federal laws mandate that the mortgage loan borrower needs to have tangible net benefits in order for the mortgage loan originator to pursue in refinancing the mortgage loan applicant’s refinance mortgage loan applications.  There needs to be a 5% payment savings on the mortgage loan applicant’s monthly payments in order to be considered that it has a net tangible benefit for the mortgage loan borrower.

FHA Mortgage Insurance Premium

FHA mortgage insurance premium is 1.35% of the mortgage loan amount.  Those who have got a 30 year fixed rate FHA loans after mid 2013 cannot cancel their FHA insured mortgage loan until their FHA insured mortgage loan is paid off or refinanced.  On a $200,000 FHA loan, the FHA mortgage note holder pays $225 per month in FHA mortgage insurance premium, which is 1.35% of the $200,000 FHA loan balance divided by 12 months.  $225 per month is equivalent to a $45,737.30 mortgage balance at a 4.25% mortgage rate.  Many homeowners may not realize that their homes may have appreciated 20% or more in the past several years.  Many homeowners purchased their homes after the financial and real estate collapse of 2008 and properties have steadily increased in value year after year.  Even if their homes have not appreciated 20%, the Lender Paid Mortgage Insurance program on conventional loans offer no private mortgage insurance required by the mortgage loan borrower for a slightly higher rate.  Conventional mortgage rates for prime borrowers with higher credit scores are at 4.125% right now.  15 year fixed conventional mortgage rates are below 3.5%.  FHA mortgage insurance premium can no longer be deducted and claimed as a tax deduction.  Even if the homeowner elects to pay private mortgage insurance, private mortgage insurance on conventional loan programs can be as low as a third of FHA mortgage insurance premium.  Mortgage insurance premiums is no longer tax deductible but mortgage interest still is tax deductible.

Conventional Loan Programs Have Stricter Lending Guidelines

Conventional loan programs have stricter mortgage lending guidelines and not everyone who has a FHA loan may be able to refinance out their FHA loan into a Conventional loan.  For example, the waiting periods for conventional loans after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale is different than those of waiting periods on FHA loans.  There is a mandatory waiting period of at least 4 years after a discharge of a bankruptcy to qualify for a conventional loan whereas for FHA loans, the waiting period is 2 years after a bankruptcy discharge.  The waiting period after a foreclosure to qualify for a conventional loan is 7 years where the waiting period after a foreclosure is three years for a FHA insured mortgage loan.  Waiting periods after a deed in lieu of foreclosure and/or short sale for a conventional loan is two years if the mortgage loan borrower has at least 20% equity and/or down payment for a home purchase and it is 4 years if the mortgage loan borrower has at least 10% equity and/or down payment on a home purchase.  FHA allows a three year waiting period after a deed in lieu of foreclosure and/or short sale.  If the home mortgage loan borrower has less than 10% equity and/or down payment for a conventional loan, then there is a mandatory 7 year waiting period after a deed in lieu of foreclosure and/or short sale.

How Long Do You Intend In Living In Your Current Home?

There are closing costs associated with your refinancing and your mortgage loan originator can go over your break even point.  The break even point is where how much you will be saving on your monthly payments with your refinance mortgage loan and how long it will take that savings to cover your closing costs.  For example, if your closing costs on your refinancing is $3,000 and your payments are reduced by $300 per month after your refinancing, then it will take you ten months to recoup your $3,000 and thereafter your actual savings starts.  If you are planning on selling your home in ten months or less, then refinancing may not be a wise move.  Discuss your intention with your mortgage loan originator and he or she will guide you in the right direction.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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