I know I am absolutely bludgeoning the living shit out of a dead horse by bringing up this topic again, but I'm curious about how the mortgage payoff debate changes if someone is paying PMI on their mortgage.
By way of background, my fiancee and I bought a house at the end of 2015. Even though we didn't have 20% down, we thought it would be a good idea to purchase because it was a very "mustachian" purchase--it was way cheaper to own than rent, total purchase price was $127,500 (about the cheapest you could get for a house in this school district), it did not require a lot of repair, it is only 1,050 square feet with a finished basement (meaning low utility costs), and it was the kind of house we could see ourselves in for an incredibly long time.
Because we were somewhat short on cash, we decided to put only 5% down. Our mortgage is $121,500 at an interest rate of 4%.
Our mortgage payment totals $859 per month and breaks down as follows:
$183 to principal
$385 to interest
$183 to property tax
$46 for homeowners' insurance
$63 for PMI
The PMI is obviously an incredible waste and serves absolutely no beneficial purpose. I've looked at the mortgage and there is no pre-payment penalty, and we are sitting on a bit of cash due to my fiancee recently switching jobs and contributing to our savings account rather than a 401k (she's not eligible for a 401k until the fall). I'd love to get down to 20% equity so we can knock that PMI part off our mortgage payment, which would reduce the mortgage payment to $796.
My inquiry is how this particular situation applies in the great "mortgage payoff" debate. My assumption is that getting rid of PMI is in itself somewhat of a return, which means my "return" in getting the mortgage to 20% equity is greater than the 4% interest rate on the mortgage.
I've run an amortization table, and it looks like if we just make the mortgage payment, we will be paying PMI until December of 2023. $63/month x 80 months = $5,040. That's a lot to throw away for basically nothing, but I don't know how this lump sum is reflected via a rate-of-return-type of calculation.
I'd love to hear some opinions and/or calculations as to my current situation. Thanks!