so i am in a bit of a dilemma. i reached out to my mortgage guy since interest rates have dropped really low. i currently have a 5yr ARM at 5.125% set to reset in '13...

unfortunately, like many others, the equity on my house has dropped since i bought it, so the appraisal came in lower than expected. this means my refi will now put me at over the 80% LTV and require me to pay PMI unless i want to shell out the difference towards an additional down payment on the loan... i am aiming for $0 out of pocket...

new rate is 3.75% - interest savings worked out to be about $300...

BUT now that i have to pay PMI, i save only about $150/month...

is it still worth it to refi, even tho now i have to pay PMI? i am not paying any closing costs other than my interest and tax prepays which is normal...

 

Is $150 worth it for you?

What's your long term strategy? If you're planning on staying there for a while, why not do a 30yr fixed. I bet you can get that ARM rate at a 30yr fixed. Rates will never be this low again.

 

Even with the PMI you will still pocket $1800 a year, 9k over 5 years.
Is the PMI deductible? If so then even more in your pocket.

 

Yes, go for it. How long would you have to pay PMI to get u back to 20% equity? I would try to scrounge up the cash to get to 20% if at all possible.

 

i don't plan on being in the house forever... just buying a bit more time before i sell it and move onto something else... so i am looking to get the best rate i can without having to lay out too much money up front... for me to get to 20% equity right now is approx $15k... i know i can pay that down within a few years and eliminate my PMI down the road... but to lay out $15k now doesn't make sense to save $300 a month... the payback is way too long...

unfortunately i am over the limits to be eligible to deduct PMI... so essentially, the trade off for the $1800 in my pocket is less the tax write off i would get now paying against my current interest rate... but then again, you can't deduct ALL of your mortgage interest... just up to your tax bracket IIRC...

 

IMHO the $1800/yr may be a gift. There is no guarantee that values will go back up short term so the window is likely for a limited time.

 

Can you get some HARP assistance?

 

If the math is looking like the refi is going to cost you more a year then it's probably not worth it unless you are going to see significant change in the reduction of principal with each monthly payment. You need to get a hold of a spreadsheet that will allow you to figure out if it's worth it.
Give this one a shot http://www.joecheng.com/amortization/

Create one spreadsheet with your current mortgage, then a second one with your proposed new one. You need to do a little bit of extra work to account for the PMI and also how much you get back from the IRS with the current loan and what you would get back with the new loan.

 

Probably worth it, as you can cease paying PMI when you hit 20% equity (as mentioned), and you still save some in the interim.
If you stay longer than anticipated you still have a great rate

 

It really just depends on how long you plan on being in the house VS how long it will take for you to recoup the PMI AND Closing costs.

 

to be clear... there are no closing costs... so i have zero out of pocket to do this deal... i figure the downside (where i am paying is resetting the term of the loan now to 30 yrs, and the tax i write off on the interest difference) i can gain in a sense that i have an immediate up front savings every month... and as pmp said, i can use the savings towards putting it towards the principal and get the PMI eliminated?

or is my thinking backwards? i only plan to be in the house maybe 5 yrs max...

 

Is $1,800 a year less the tax hit worthwhile to you? There's your answer.

 

Questions to answer:

Are you going to a 30 year fixed?

Did you ARM have a "floor" in it? (Meaning your rate can only go so low)

It sounds like you SHOULD refinance, especially if there are no closing costs or hidden fees.

 

see in red... not sarcasm...

 

I was thinking that since thats a really high rate for an ARM. The bank is liking you right now.

Refinance. Do it. Even with the PMI. (since thats tax deductible too, afaik)