Should I refinance with mortgage insurance? : Bad Credit Advisor

Should I refinance with mortgage insurance?

Q: I am currently paying the 30 year fixed mortgage at 6.25% interest rate. Bank of America just offered me a 15 year fixed rate mortgage at 5.00%. The problem I am having is the value of my Charlotte condo. It went down from $320,000 to $285,000 in just two years and I owe around $254,000, which puts my loan-to-value just under 90%. The loan officer said I would pay close to $100 in monthly mortgage insurance, which is not tax deductible in my case. So, should I refinance with mortgage insurance? Bank of America seems thinks so and will pay closing costs.

A: I don't know. The one and only thing to consider is - do you want to keep the condo for a very long time? Based on what you provided, your mortgage payment is currently around $1,560 a month of which roughly $1,300 is the tax deductible interest. If you choose to refinance for a 15 year fixed at the quoted rate, you will be paying just over $2,000 with $1,060 going to the interest plus some $110 in PMI which you stated you can't deduct.

You will be paying off your condo much faster and at a lower rate. But here are two problems. If home values keep on falling and I believe they will, it may take a while for you to get your LTV under 80% so PMI would drop. Second, you will be paying off for a declining asset which value may never get back even close to what you paid for it. You will not be able to get the money back, when you have to sell. People tend to sell condos rather often, even if they initially plan to retire there. With rising association costs and city taxes, who knows what you will be doing in a few years. Should you refinance with mortgage insurance? No. I personally wouldn't lock myself in a 15 year mortgage even without PMI, but would try to pay as little as possible in the current real estate market. Just my opinion, but then you asked for it.

Here are few related posts you may find engaging,
Should I refinance my mortgage - interest rates are lowest since 1960s
Should you refinance now or do loan modification

Mon Jul 6, 2009 02:07PM by Tony | More in Mortgage | Comments (0)