Case study: Adrienne's experience
My husband and I took out an FHA loan in May 2015 in San Diego County. Because we put only 5% down, we pay almost $264 a month in private mortgage insurance — which feels like a fee down the drain.
At one point, I called Freedom Mortgage to ask whether we could get PMI removed if I paid the cash to get up to 20% equity. “After five years,” they answered. I did not realize this: In California at least, the FHA premium stays on up to five years and 20% equity.
I did the math on refinancing to a conventional loan and coughing up the remaining 15% to reach a 20% down payment. Because I was two years into my loan already, I had three years left of PMI to pay:
|Months remaining||Monthly Payment||Total cost|
If I refinanced to a conventional mortgage, I’d have to pay closing costs of about $2,500, plus I might qualify for a higher interest rate, because it’s a different type of loan. If my new loan was even a half percent higher than my current loan, I might end up paying $40,000 in extra interest over the life of the loan. It sounds like a bad tradeoff to save $9,500 in insurance.
We opted to keep the loan the way it is. And when the five years are up, we’ll make sure the PMI is removed.