Eliminating PMI should always be your first goal when looking to refinance your FHA mortgage. The reasons is simple, it adds nearly 1.00% to your effective interest rate (the rate you are really paying)! When factoring the Upfront PMI that you paid at closing, your payment on this loan are very high. The FHA loan did its job at allowed you to purchase the home at a low down payment. Now its time to use the new equity and get into a more advantageous loan production.
There are 3 or 4 options you will have to accomplish this goal. But, a refinance is the only way to get this done.
The FHA Guidelines do not allow lender to automatically cancel the PMI. The easiest way to eliminate the PMI is to accumulate 20% equity in your home. This happens by your home appreciation over time and by the normal amortization of your loan. However, there are other ways to eliminate the PMI. If your credit score is over 700 you can use a HELOC to make up the difference of the equity over 80%
For example if your loan to value ratio is 85% then you can do a new first of 80% and new HELOC of 5%
The second option is to do a up to 95% loan with borrower paid mortgage insurance. Borrower paid mortgage insurance is cheaper than the FHA mortgage insurance and can be cancelled without refinancing your original mortgage. This allows you to lock in today's interest rates and cancel PMI in the future without having to worry about higher rates in the future.
Refinancing can help you drop below the 80% threshold and be able to eliminate your PMI.
As always consult with one of our experts to ensure that you are taking advantage of all the current market opportunities.
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