Q: I am current on my 8-year-old FHA mortgage, which is being serviced by a major bank, one of your “big box” lenders.
I want to refinance to take advantage of lower interest rates. When I called my lender, they wanted me to pay $4,000 to $6,000 in closing costs plus the cost of an appraisal.
I’ve heard you talk about streamline FHA refinances. How can I get one?
Also, I’m wondering if I’m “entitled” to a lowering of the principal balance as well. My property taxes were recently reduced by 50 percent based on documentation I provided showing a big loss of value.
I have been paying private mortgage insurance (PMI) to the tune of $59 every month for eight years. Reducing the loan balance by $4,500 would be sufficient to eliminate that monthly PMI cost. I am thinking of taking money from my Roth IRA (I am over 59 ½) to pay down the mortgage so that I can eliminate this monthly cost when I refinance.
Should I do that? Could I use that as leverage to get my lender to reduce the principal? Even if they would not agree to lower the principal, do you think it is a wise business decision to do so?
A: You’ve asked some interesting questions that lead me to believe you’re confused on a number of points. So, let’s start at the top.
Do you actually have an FHA loan or do you have a conventional mortgage?
If you have an FHA loan, you may be eligible for an FHA streamline refinance. But, the lending industry has trained its phone representatives to recognize certain industry buzz words, so you have to specifically ask for an “FHA streamline refinance” if you want one.
But based on the rest of the comments in your question (and a subsequent back-and-forth email conversation that we had), I’m not sure that you really understand what type of loan you have.
Go back to your loan documents and see if they say FHA loan. If they do, then your loan is backed by the U.S. government and you may be eligible for an FHA streamline refinance, which would not require an appraisal and should have fees far less than $1,000. If you do have an FHA loan, then you should call your lender back and specifically ask what the process would be for a streamline FHA refinance (it’s important that you tell them those words) and how much it would cost and how long it would take and whether you still qualify for it based on how much your property’s value has declined.
Now let’s tackle a different issue: your home’s value. On the one hand, you seem to believe that you’ve nearly paid down the loan balance to 78 percent of the original sales price of the home.
If your property value has shrunk by 50 percent (the primary reason for your real estate tax reduction), and your lender knows this, you may not have enough equity in your property to eliminate PMI without adding a huge amount to the principal. You seem to feel that you’d only need an additional $4,500 to get there, and if that’s the case, terrific.
If your loan is not an FHA loan, when you initially signed your loan documents you were likely told that you could get rid of PMI if you kept the loan a certain length of time, did not missed payments for several years and had paid down the loan balance such that your current balance would be less than 78 percent of your original loan’s balance. If that’s the case, you may be able to drop PMI based on the original purchase price and original loan amortization schedule.
There are plusses and minuses to an FHA loan: You might be able to do a streamline FHA refinance, which is a benefit. And, FHA loans are assumable. But you’ll pay MI for the life of the loan, which may not be so great.
If your lender has been telling you that with a $4,500 cash infusion you can pay down your loan to the point where you’d be able to get rid of PMI that tells me you do not have an FHA mortgage. But, you should check to be sure.
If you have a conventional loan, you can take out money from your Roth IRA to get rid of PMI, but first understand how much you’d have to take out and how much you’d save each month versus how much you’d earn with that cash invested elsewhere.
And, if you do try a conventional refinance, you’d have to be sure that it’s really worth it, because your lender will pull an appraisal of the property and if your property value has dropped by 50 percent, you could actually be underwater with your loan – and open up another can of worms.
Finally, I’m not sure what you mean about being entitled to a reduction in principal. Only a small number of banks are offering loans modified with principal reduction and it is being used only in the most extreme cases where homeowners have been delinquent for months. If you’re on time with your payments, you wouldn’t qualify. And if you default on your loan, you might not get the reduction anyway.
I’d focus on refinancing your property and deciding whether paying down the loan to eliminate PMI is worth it.