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.

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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.