Another "pay down mortgage to remove PMI?" thread...

[GuinnessPhish]

Currently pay $226.20 a month PMI on 3.75% mortgage.

51 more months until PMI is automatically removed.

$226.20 X 51 = $11,536.20



In order to get mortgage down to 80%, we'd have to pay $36,000.


Would liquidating some Roth IRA investments (principle, not return) make sense in this scenario?

[justajane]

Seems risky to me. Perhaps if you  had the cash I would say do it, but I'm hesitant to ever recommend taking money out of a retirement account. What's your age?

Any chance the market in your area is on the upswing and that you could benefit from another appraisal in the next couple of years?

[skunkfunk]

I wouldn't. That's not a great return on $36K from a Roth. If it was a taxable account then yeah sure.

[GuinnessPhish]

We are 37 and 36 years old.  The market around us in northern virginia is good, but it will be a few more years before the value of our home would reach what it needs to in order to qualify for removal of PMI.  Then there would be the $450 appraisal we'd have to pay for as well.

[thd7t]

I don't recommend liquidating investments to eliminate PMI, here, but it is sort of like you're borrowing $36000 for four years at 3.75% and paying and $11,000 premium to do so.  That's like 15% per year on that relatively small amount.  Can you divert some of your future FI funds in that direction?  It seems like a great ROI.

[GuinnessPhish]

I don't recommend liquidating investments to eliminate PMI, here, but it is sort of like you're borrowing $36000 for four years at 3.75% and paying and $11,000 premium to do so.  That's like 15% per year on that relatively small amount.  Can you divert some of your future FI funds in that direction?  It seems like a great ROI.

not sure I understand that....

The question we are trying to answer to determine whether we should take the money out of our retirement account to pay PMI off now is;
Will $36K invested today return more or less $ in 51 months (4.25 years) than the $11.5K guaranteed return we will get on paying PMI off now?

[Cheddar Stacker]

226.20*12=2,714/36,000=7.54%

So, you are effectively paying 7.54% PMI interest on top of your 3.75% mortgage interest. That's a steep penalty. It might be worth it to cash out the Roth, but you can't put it back into the Roth so think long and hard about it.

If I'm you I'd make another plan to raise $36K quickly. Expense reduction, HELOC, side gig, 401K loan, sell a kidney on the black market, whatever it takes.

[thd7t]

226.20*12=2,714/36,000=7.54%

So, you are effectively paying 7.54% PMI interest on top of your 3.75% mortgage interest. That's a steep penalty. It might be worth it to cash out the Roth, but you can't put it back into the Roth so think long and hard about it.

If I'm you I'd make another plan to raise $36K quickly. Expense reduction, HELOC, side gig, 401K loan, sell a kidney on the black market, whatever it takes.

Right, but really it's divided by the average of the principal, which is $18,000, because the principal to reduce will be reduced by approximately 9000/year.  So first year, 7.54%, second year around 11%, third year 15%, fourth year 19%.  Your number didn't amortize the principal.

[GuinnessPhish]

$226.20 PMI is on an original loan value of $522,000, I believe. 

[thd7t]

That's true, but it's only applied to the first 22% of the loan, so it's effectively only interest on that portion of the money.

[Cheddar Stacker]

226.20*12=2,714/36,000=7.54%

So, you are effectively paying 7.54% PMI interest on top of your 3.75% mortgage interest. That's a steep penalty. It might be worth it to cash out the Roth, but you can't put it back into the Roth so think long and hard about it.

If I'm you I'd make another plan to raise $36K quickly. Expense reduction, HELOC, side gig, 401K loan, sell a kidney on the black market, whatever it takes.

Right, but really it's divided by the average of the principal, which is $18,000, because the principal to reduce will be reduced by approximately 9000/year.  So first year, 7.54%, second year around 11%, third year 15%, fourth year 19%.  Your number didn't amortize the principal.

Good point, thanks. I was considering that the lower the PMI gap is the higher the interest, but I didn't factor it into the calculation. I like what you did there.

[thd7t]

Thanks, I recently spent a lot of time trying to figure out if I could/should eliminate MIP.  I realized that it was a much bigger cost than I'd thought.

[justajane]

For me it's not so much a question of mathematics but rather about the precedent it sets. You can probably frequently find a "good" reason on paper to raid your retirement accounts.

The mindset that this money is available to you is what concerns me.

[Cheddar Stacker]

$226.20 PMI is on an original loan value of $522,000, I believe.

Yeah GuinnessPhish, you're looking at it incorrectly. That's how the bank calculated what the PMI should be, but since the PMI disappears once you pay down the loan to either 80% or 78% LTV, that's your true "interest rate" on the PMI.

So 15% ish, although if it's 78% LTV the interest rate drops a bit. Based on the $522K you need to either reach $417,600 (80%) or $407,160 (78%). If it's $407,160 that adds $10,440 to your $36,000 for a total of $46,440. So:

226.10*12=2,714/(36,000/2)=15.08%
226.10*12=2,714/(46,440/2)=11.69%

Also, I love Guinness and have been a Phish fan since 1994, so I dig your name.

[juuustin]

I have a similar MIP payment but unfortunately it is an FHA loan so you can't just have it appraised for the removal.  My understanding is I either have to wait the full 5 years, or re-fi to a conventional.

I am at about 83% LTV and I believe (based on current amortization schedule and modest appreciation) I will be at 80% about one year before it automatically comes off at 60 months from purchase.  It would cost around $10,000 right now for me to re-fi and obtain an 80% LTV.  This is not including the higher interest rate that I will be incurring.  I have been contemplating it for awhile, but I think I missed the boat on the super low re-fi rates unfortunately.

[solon]

I think I missed the boat on the super low re-fi rates unfortunately.

Look again. Mortgages just hit a 16 month low!
http://www.bankrate.com/finance/mortgages/mortgage-analysis.aspx

[Cheddar Stacker]

I think I missed the boat on the super low re-fi rates unfortunately.

Look again. Mortgages just hit a 16 month low!
http://www.bankrate.com/finance/mortgages/mortgage-analysis.aspx

Also, you could refi with a new appraisal and not need to bring $10K to close. They may even cover closing costs in exchange for a slightly higher rate. Even if you come up $3K short, it might be worth it.

[juuustin]

I think I missed the boat on the super low re-fi rates unfortunately.

Look again. Mortgages just hit a 16 month low!
http://www.bankrate.com/finance/mortgages/mortgage-analysis.aspx

Also, you could refi with a new appraisal and not need to bring $10K to close. They may even cover closing costs in exchange for a slightly higher rate. Even if you come up $3K short, it might be worth it.

I am very intrigued.  I hadn't been paying attention to the rates at all recently.

Quick and dirty details:

Loan Date: 2/2012
Rate: 3.75%
Original loan: 305K
Current balance: 278K
Estimated Appraisal: 335K (my best guess based on comps)
FHA LTV (based on purchase price): 91.2%
"Real" LTV: 83.0%
Current MIP: $279!!!!

I really don't want to have to bring money to the table, but looking at the numbers, eliminating that MIP may make it worth it.  I'd be willing to take a 7/1 as well because my wife and I do not see ourselves here for more than 7 years longer.

[Bob W]

No do not touch the IRA.

Do ask for a PMI reduction.  Do shop for a better rate.    Do officially ask for a senior exec at the servicing loan company to review your written request.   Consider offering to  pledge your IRA account as collateral if they seek additional collateral.   

This is really worth a lot of effort on your part due to the over 10K we're talking about. 

[Cheddar Stacker]

@juuustin I'd do the ARM since it will get you the lowest rate fixed for the rest of your stay. $279/month is absurd. Take the rest of the day off to get this done. Go tell your boss I told you it was ok. That should be good enough.

[juuustin]

@juuustin I'd do the ARM since it will get you the lowest rate fixed for the rest of your stay. $279/month is absurd. Take the rest of the day off to get this done. Go tell your boss I told you it was ok. That should be good enough.

Cheddar, thanks for telling my boss!!  I actually just got off the phone with a lender.  It looks like worst-case scenario (appraisal only $310K) will cut my total out of pocket by $300/month.  I definitely need to bang this out quick (aka tomorrow!!).

[GuinnessPhish]

I figured I'd just post to this thread again, instead of starting an all new one....


ok, so we've scrapped the idea of taking money out of retirement accounts.

Now, we're thinking that we'll stop funding the retirement accounts and 529 accounts for about 1 year or slightly longer.  We'll pay an additional $2000 a month toward our mortgage, which should bring us to the principal amount we need to be at in about a year.


If we get PMI removed by 2/16, we'll save three years of PMI, so roughly $8143.

Does this make sense, or should we just forget about this idea and keep funding the retirement and 529 accounts as usual?

[ShoulderThingThatGoesUp]

I figured I'd just post to this thread again, instead of starting an all new one....


ok, so we've scrapped the idea of taking money out of retirement accounts.

Now, we're thinking that we'll stop funding the retirement accounts and 529 accounts for about 1 year or slightly longer.  We'll pay an additional $2000 a month toward our mortgage, which should bring us to the principal amount we need to be at in about a year.


If we get PMI removed by 2/16, we'll save three years of PMI, so roughly $8143.

Does this make sense, or should we just forget about this idea and keep funding the retirement and 529 accounts as usual?

Make sure you're taking into account that you'll now be taxed on that money, so it won't be as much in your paychecks as you're contributing. You probably have, but it would be an ugly surprise.

[Gone Fishing]

Based on the effective rate, this is hair on fire debt.  Yes, retirement accounts are sacred, and no, you can not go back and refund them later, but a 10%+ guaranteed return on your money it is worth it, especially considering the market is probably going to have a hard time maintaining similar returns over the next few years (yes, this is market timing, we all do it any time we choose between debt paydown and investing, please don't light my underwear on fire!).  If you plan on FIREing in a low tax bracket, a Roth is not that much better than taxable accounts at the moment, due to favorable tax treatment of investment income but this could change at some point in the future.