Author Topic: I'm refinancing and am debating paying down to get out of PMI - sanity check?  (Read 346 times)

JLee

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$474k appraisal, $413k loan amount, $110/mo PMI cost, mortgage 30yr @ 2.5%

If I pull investments to knock my loan down to $379,200, I'd be at 80% and drop PMI.

Current loan will be $1631.85/mo plus $110.13 PMI for years 1-5, so $1741.98 for 5 years and then $1631.85 after.

If I pull ~$34k from my Vanguard account, my loan could be $379,200 and my payment would be $1,498.30.

This saves me $243.68/mo for 5 years, or $2924.16/year on a $33,800 withdrawal, for a 5 year annual effective return of 8.6%. After 5 years, my differential is $133.55/mo, or an effective return of 4.74% on the $33.8k.

Ordinarily I would want to finance as much as possible at 2.5%, but given I have the opportunity to drop 5 years of PMI, I'm considering if it'd be worthwhile.  Have I made some math errors here or is this a no-brainer?

thd7t

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I'm really against PMI.  I usually treat it like a non-amortizing interest rate on the top 20% of your loan (and the interest on the primary loan).  In this case it would mean that you have a loan for $379k at 2.5% right now and a loan at $34k at 2.5%+$1320/year.  That makes the top portion of your mortgage about 6.3% when you include PMI.  However, that $1320 never goes down, so it becomes a disproportionate percent of your loan value (when you owe $10k before you pay off PMI, just the PMI portion is over 10% of the value to get rid of the payment).

I think it's a good idea.

JLee

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I'm really against PMI.  I usually treat it like a non-amortizing interest rate on the top 20% of your loan (and the interest on the primary loan).  In this case it would mean that you have a loan for $379k at 2.5% right now and a loan at $34k at 2.5%+$1320/year.  That makes the top portion of your mortgage about 6.3% when you include PMI.  However, that $1320 never goes down, so it becomes a disproportionate percent of your loan value (when you owe $10k before you pay off PMI, just the PMI portion is over 10% of the value to get rid of the payment).

I think it's a good idea.
Yeah, that's my thought as well - it hurts to pull that much out of an investment account but I think the math is clearly in favor.

MrThatsDifferent

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Have you calculated the value of leaving the money in your account over 10 years?

JLee

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Have you calculated the value of leaving the money in your account over 10 years?

Nobody knows (depending on market, 6% would be under $27k) vs a guaranteed $23k in savings.

JLee

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Well that was a hard click to make, haha - but I think it's the right call. Sell order is in.

yachi

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I did exactly this calculation a number of years ago, and decided to pay off the PMI.