Some good news has come up in the last couple of weeks, as I’ve happened upon a temporary job for the next couple of months. Since we’re buying a house, we looked at what we can do with the extra income.
For background, we’re getting a 30-year fixed rate FHA mortgage for our town house. This means that our interest rate will remain the same through over the life of the mortgage. Since it’s an FHA loan, however, there are some differences vs. conventional loans.
FHA loans and the Mortgage Insurance Premium
With a conventional loan, if you make a downpayment of less than 20% of the purchase price, you either have to pay for Private Mortgage Insurance (PMI), or take out a piggyback loan to make up the difference. With an FHA loan, if your downpayment is less than 20%, you have to pay a Mortgage Insurance Premium (MIP).
For loans with terms longer than 15 years, the law currently requires your MIP to remain in place for at least 5 years, whether or not your loan-to-value (LTV) ratio drops below 78%. With a conventional loan, most lenders will allow you to drop your PMI, though you might have to make a special request.
Keeping that MIP in place — at a cost of roughly $50/month for 5 years — will take up money that we could use for other things. We had hoped to use my extra earnings to pay for it in advance and keep it from getting rolled into the mortgage, but…
I called the Housing and Urban Development (HUD) hotline for the FHA’s resource center (1-800-CALL-FHA) to asked about doing this and was told that we can’t. While that was a bit disappointing, we’ve decided to change our game plan a bit.
Our new plan for my windfall income
We’ve always been careful to avoid putting ourselves in a financially vulnerable position, so we’ve decided to continue down that road by putting using my extra income to increase our emergency fund.
We’re also going to put some toward a refrigerator for the townhouse (which doesn’t come with one). We were going to buy a friend’s fridge which still was under warranty, but it was too big to fit. So now we’re in the market for a new one. If you have any suggestions, they’d be greatly appreciated. Hopefully, this new appliance rebate program can work out for us. 🙂
The home-buying process has been very crazy so far. Hopefully, it’ll turn out alright when all is said and done. Have you ever had an FHA loan? If so, how was your experience? And do you have any tips to share?
Note: The good news is that MIP payments are, in many cases, partially refundable. If you have an FHA loan and are wondering if you’re due a refund, go to the HUD refund site and enter your loan details.