Best refinance option

Even with my comment, I see this as paying 1/8% more ($22/mo) to avoid PMI ($174) so yes, C is the winner.

The question is staying put is a complex one, more so than the A/B/C.

  • Any non-mortgage debt at all?
  • Is your emergency fund fully funded? (What ever than means to make you comfortable)
  • Are you funding your retirement accounts?

There's value in liquidity. But, it appears your current PMI is so high, that this move to C is a small increase in payments per month ($210) compared to the normal P&I difference ($800). Had the math produced an $800/mo negative to your cash flow, I'd have offered an alternate answer.

EDIT - In response to OP's edit - for option B - the PMI is about 5/8% of the mortgage balance. The top $50K of the debt is what is triggering the PMI, So I look at this as if the "rate" on that $50K is an adder of 4.25%.

i.e. if you look at the $337K as having two parts - the main loan, $287K at 3.5%, and the $50K at 7.75%, the math will show this underestimates it by a wide factor - in fact, to match the total payment of $2584, with zero PMI, you'd need to assign a rate of 9.875% to that $50K.

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The total payment is what it is, but when you view the $50K in this light, it emphasizes the true cost of that money, and may help you prioritize it differently in your debt repayment/savings decisions. e.g. For me it would take top priority right after my 401(k) matched deposits. I'd be paying off 10% debt before saving a dime beyond that. And when I saw a 2-3% credit card offer, if I were near the final year of killing this $50K, I'd grab 3% money to finish it off.

Recapitalize - This simply means that if you make a large payment, the bank will offer to recalculate your payments to stay on the same payoff timeframe. Start with $200K/30 yr loan, if you pay $20K today, you've just shortened the loan by almost 5 years because the same payment is due next month. Instead, the bank will offer to adjust the payment down by 10%, and the term remains 30 years. It's a good feature if you care about it.

EDIT: Originally, Options A and B were specified as FHA loans. Since they are actually conventional loans, my answer no longer applies. I'm leaving my answer in case someone else finds it useful for FHA loans.


FHA rules regarding PMI changed last year. It looks like they require PMI to be paid for at least 11 years. Depending on the initial LTV%, it could be the life of the loan. This means that you will not be able to drop PMI when the LTV% hits 78%. Since you are refinancing an existing FHA mortgage, perhaps different rules will apply to you.

Based on this permanent/long-term PMI requirement, I would choose Option C.

With option B if the market does not move in either direction, you will be paying PMI until December 2016 when the loan balance goes under $296k (80% of the appraisal of $370k from that lender). 28 payments of PMI will set you back $4879.

The extra interest you would pay over 15 years with a rate of 3.63 instead of 3.5 is $3900, so even before discounting for taxes this is a better deal.