Is it smart to refinance to an FHA loan if you don't qualify for a HARP Fannie or Freddie refinance?
By Gina PogolMortgage Credit Problems Columnist
Derek Says: Hi Gina,
Thanks for your advice - I've enjoyed your articles.
I have a situation where I purchased a house for $600k and paid down 20%. The mortgage I got was interest only at a fixed rate for the first 5 years and adjustable after that. However, given the depressed property values, it now is probably worth around $540k (looking at comparables around the area). So my remaining mortgage is a jumbo at around $480k.
My mortgage converts to a fully amortizing, adjustable rate in about a year, and I am worried about the interest rate risk since it is adjustable after it converts. I'd like to switch to a traditional fixed rate mortgage. I see rates are low, but given my loan-to-value rate, I can't find someone to refinance (my credit is actually pretty good). I don't qualify for Obama's plan because my mortgage isn't owned by Fannie or Freddie.
I did find a lender who would let me refinance with an FHA loan, but I don't like having to pay the extra 1.5% on top of the loan. Should I refinance with the FHA loan? Or should I wait until I can pay down my mortgage to an acceptable LTV so I can refinance without the FHA fee (I think about a year)? Any advice on the subject?
Gina Says: Hi Derek,
I have a big question for you before answering yours. How long do you plan to keep your home? Right now there are many, many people with adjustable rate mortgages who are dancing in their driveways. With typical margins at 2.5% to 2.75%, and most indexes near zero, most of these homeowners are paying less than 4%. I have a 5/1 and would dearly love to have it converting now. Sigh. If this isn't your lifetime dreamhome, leave your mortgage alone.
If you plan to have grandchildren visiting you there in 20 years, though, you are smart to be thinking about reducing your interest rate risk. Your loan to value, at 88%, isn't bad. And putting 20% down when you started allowed you to avoid mortgage insurance (MI). Keep in mind that if you refinance you'll probably find yourself paying MI.
First, ask your own lender/servicer to modify your loan to a fixed rate product--not refinance (which might require mortgage insurance, yuck) but a modification. Many are willing to do this even for borrowers who don't qualify for HASP help--again, even those who don't have bad credit or mortage problems.
You didn't mention your income situation. Your loan balance is below the Obama Plan's $729,750 limit. So eligibility for a modification depends on the relationship between your housing expenses and your income. If your housing expense exceeds 31% of your gross income, you could be eligible for a modification. And you don't have to have bad credit to qualify. Check www.makinghomeaffordable for details.
If income isn't a problem and you just want to save money (who doesn't!) try applying for a 15 year mortgage--better rate, less risk to the lender, more likelihood of approval, and less overall expense for you. And even if you have to go to FHA for that, you don't get stuck with the monthly MIP since your LTV is less than 90%--just the upfront premium of (I know, gag) 1.5%.
Finally, you say your credit is "pretty good" and I'm sure it is. But Fannie Mae and other lenders have redefined "pretty good" and load mortgages for regular folks with all sorts of surcharges that can make a 1.5% FHA fee look like a gift. Check the Loan Level Pricing Adjustment Matrix here (I call it the Chart of Death) and see what your add-ons could end up being even if you were able to refi through Fannie or Freddie.
If you qualify for an FHA when you formerly had a jumbo loan, I have to assume that you live in a HUD-designated "high-cost" area or FHA wouldn't be in the picture. Make sure your loan officer knows the limits in your area and doesn't put you through the whole process for nothing. With the amount of equity you have I'd have a hard time swallowing the 1.5% fee, but the other considerations are these: interest rates are known to stay low during recessions and rise substantially afterword. Do you want to watch and sweat this out for a whole year?
Normally, a point and a half would lower a thirty year mortgage between .25% and .375%. So, if you could get 4.75% now, while paying 1.5%, that equals about 1% to 5.125% next year without paying the 1.5%. And if rates go to 6% you are going to feel less intelligent than you would like. Are you willing to bet that rates aren't going to increase by at least .375% during the next year?
If I could get modification from my current lender that would be my first shot. Otherwise, if I could get an FHA I'd shop like crazy for a good loan pro and rate and grab it. But that's just me.
About the Author
Gina Pogol has over a decade of mortgage lending experience, in addition to practice as a paralegal for a bankruptcy attorney, and as a business credit consultant for Experian. She is also certified to underwrite Fannie Mae loans. She earned her BS in Financial Management from the University of Nevada.
All information provided “as is” for informational purposes only, and is not financial advice. MortgageCreditProblems.com, its affiliates, and any of the independent providers of information on this site shall have no liability for any informational errors or incompleteness, or for any actions taken in reliance on information contained herein.
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