Author Topic: Emergency debt? Or not?  (Read 3437 times)

Vitai Slade

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Emergency debt? Or not?
« on: June 29, 2013, 03:48:40 PM »
I have a new mortgage at 2.875% for 15 years. The ridiculously low interest rate has led me to believe that investing in index funds would be a better option than early principal payoff. However, I only put down 10% of the value of the home and have PMI because of it. Should I make early payments until I get rid of PMI or is it still better to invest in vanguard funds?

gooki

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Re: Emergency debt? Or not?
« Reply #1 on: June 29, 2013, 03:51:26 PM »
Do the maths.

And if you can't be bothered, then yes, pay down the loan to remove PMI.

BC_Goldman

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Re: Emergency debt? Or not?
« Reply #2 on: June 29, 2013, 03:52:19 PM »
I think it would depend on how much your PMI costs and how much you'd need to hit the point where you can drop PMI.

BC_Goldman

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Re: Emergency debt? Or not?
« Reply #3 on: June 29, 2013, 04:11:50 PM »
Hmmmm, I should do this myself.  I paid slightly over 100k for my condo. Current balance is under 92k now. Another 12k puts me below 80% and I can cut $42/no for PMI. Quick math says that's a 4% roi not even counting the reduced interest and increased principal it would garner.

BlackRat

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Re: Emergency debt? Or not?
« Reply #4 on: July 02, 2013, 08:13:48 AM »
Does that interest rate include the PMI?
How much would it cost to get over the PMI threshold (20% equity?) and how much would that decrease the monthly costs?
Use the answers to this second question to find the return on investment for getting rid of the PMI and compare that to how you expect the fund to do.
With an interest rate that low I don't think you can really lose though

brewer12345

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Re: Emergency debt? Or not?
« Reply #5 on: July 02, 2013, 08:35:46 AM »
It looks like that last $12k is costing you just over 7% annually when you add together the PMI cost and the interest on that money.  If I had the opportunity to make a riskless 7% I would show up with a lot morethan $12k to dump into it...

BC_Goldman

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Re: Emergency debt? Or not?
« Reply #6 on: July 03, 2013, 01:35:54 PM »
Yeah, looks like my PMI works out to 4% per year and my interest rate is 3.75% so 7.75% roi for about 6 years which is the point where I would have hit 80% via normal payments. For 7.75% maybe I should just transfer money from my line of credit to make it happen. My rate on that is 6.5% so I still come out ahead by 1.25%. I need to dig out my paperwork and see if there's a minimum amount of time I am obligated to pay PMI otherwise it's a losing proposition. Repayment on the LOC would be around 240/mo if I took the full 12k from it.

velocistar237

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Re: Emergency debt? Or not?
« Reply #7 on: July 03, 2013, 02:12:18 PM »
Should I make early payments until I get rid of PMI?

Yes, do that before putting any more money into Vanguard. You're paying more than 8% interest on that second 10%.