Q: My home value has gone up since I bought in 2012. Should I refinance and pay about $4,000 in closing costs to eliminate my private mortgage insurance? — Joi Marquez, Las Vegas
A: When considering a refinance, a crucial calculation is your breakeven point: When will the interest savings on your new loan offset the costs of refinancing, and will you stay in your home long enough to benefit?
You told us you are now paying $584 a month on your 4.75% 30-year mortgage, which includes around $80 in private mortgage insurance charged because you didn’t put 20% down. If you refinance your $75,000 balance into a 5/1 adjustable-rate mortgage at 3.75% you’ll save about $46 per month. At that rate, given the closing costs, it would take you around seven years to break even.
Doesn’t sound like a good deal—except that you’ll also eliminate the $80 monthly FHA private mortgage insurance (PMI) payment, which you can’t otherwise drop for another two years.
Mortgage broker Dan Green, who blogs at TheMortgageReports.com, says putting the $126 savings back into principal will boost your breakeven point and ultimately save you in interest payments. And, PMI is no longer tax-deductible, another incentive to get rid of it, he says.
Keep in mind that by choosing an adjustable-rate mortgage over your current fixed, you take the risk that after five years your rate will reset higher, negating savings.