Good morning Sandy,
The best loan for you depends on many questions that you need to answer before I can make a solid recommendation:
1. What is the purpose of your refinance? You have a good rate. If you have an FHA loan with "forever" mortgage insurance, that could be a good reason to refinance to a conventional (non-government) loan. If you want to do some home improvements, which is what this looks like to me, the answer depends on the scope of the project.
The best loan for you is most likely NOT an FHA program, because your mortgage insurance cannot be canceled under today's guidelines, and you have significant home equity. In fact, you are very close to having 20 percent equity and needing no mortgage insurance at all.
1. If you have a 3.5 percent rate with mortgage insurance that will go away soon, I'd recommend that you leave the first mortgage alone, and look for a home equity loan for the home improvements. The type that is best for you depends on whether you need a lot of money upfront to pay a builder, in which case a fixed home equity loan is a good bet. If you have a project that will take a long time and be broken down into several stages, a HELOC (home equity line of credit) might be best.
2. If you have a loan with "forever" mortgage insurance, you have a couple of choices. You can refinance the first mortgage to a new loan with no mortgage insurance, and then add a home equity loan or line of credit to take care of the improvements. Or, you can choose a cash-out refinance.
However, in this case, a cash-out refinance would put you over that 80 percent loan-to-value, which means you'd still be paying mortgage insurance premiums. In addition, a cash-out refinance comes with some pretty stiff risk-based surcharges, and those surcharges are calculated on the entire loan balance, not just the cash out.
So if, for instance, you want to take out $10,000 when you refinance, and your pricing adjustments for cash out come to 2 percent of the loan amount, you'd be paying about $7,000 in fees to get an extra $10,000. Not the best way to do what you want.
If you had very little equity and wanted to do a big renovation, the 203(k) would be an option. That's because your loan amount is based on the improved value of the property, and that allows you to borrow more. In this case, though, because you have significant equity, I think you can borrow more cheaply with a conventional (non-government) loan. Find out by completing this short form and get offers from competing lenders.
Good luck, thank you for writing, and please touch base if you need more information.