Author Topic: Mortgage with PMI vs. Investments? Advice, please!  (Read 3848 times)

JustTrying

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Mortgage with PMI vs. Investments? Advice, please!
« on: August 06, 2014, 08:02:49 AM »
I'm hoping that someone smarter than me can help me figure out what's best from a mathematical perspective. I bought a house without having 20% down, so am paying PMI. We overpay our mortgage by a couple hundred each month, but I could choose to put less money in long-term investments (mutual funds) in order to pay down the mortgage. I have chosen not to do this since the interest rate on the mortgage is 4.125%. Because of the PMI, the math gets "messy" for me, and I can't quite figure out what the best option is. Here's the breakdown:

Home purchase price: $280,000
Currently owed: $237,500
Interest rate: 4.125%
Monthly PMI: $91
30 year loan
We bought the home less than a year ago, so I'm not sure that an appraisal would come back much higher than what we purchased for.

Does it make more sense to pay down the mortgage to get rid of that $91/month, or should I continue with my long-term investments that I'm hoping will bring in a 7% return?

Thank you for your help!

Philociraptor

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Re: Mortgage with PMI vs. Investments? Advice, please!
« Reply #1 on: August 06, 2014, 08:10:25 AM »
Your PMI amounts to around an extra half a % of interest (PMI/Owed*12). That's getting dangerously close to 5% total APY, which is my benchmark % for investing vs. paying down debt.

Also check the terms of your PMI, mine must be payed for 5 years at a minimum, regardless of amount owed. Only way to get rid of it is to refinance to another bank with a conventional (<80% LTV) loan.

Gone Fishing

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Re: Mortgage with PMI vs. Investments? Advice, please!
« Reply #2 on: August 06, 2014, 08:19:21 AM »
Looks even worse to me

80% loan to value:

280,000x80%=$224,000

Estimated amount of paydown needed to get rid of PMI=$13,500

Effective interest rate on the $13,500

Interest at 4.125%=556.87

$91/m x 12 months=1092

Total annual cost of the $13,500=$1,648

Effective interest rate=12.2%

Answer: Yes it makes sense to pay down your mortgage to get rid of PMI, you are paying 12.2% interest on the $13.5k, and it only gets worse as you pay down your loan until you get rid of it.  Your hair is on fire, do everything you can to get rid of it, I got a HELOC to pay down the difference until I could come up with the cash.  Call your mortgage servicer and see what you need to do to get rid of it, some have hoops you will have to jump through.  Let me know if this doesn't make sense I did it in a bit of a hurry..


dandarc

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Re: Mortgage with PMI vs. Investments? Advice, please!
« Reply #3 on: August 06, 2014, 08:27:38 AM »
So Close - that's the best analysis of this situation I've seen.  Really illustrates just how expensive PMI is.  Even on day 1 (if the loan was originally 280K) the interest rate was about 6% on the money needed to clear the PMI.

JustTrying

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Re: Mortgage with PMI vs. Investments? Advice, please!
« Reply #4 on: August 06, 2014, 07:39:10 PM »
So Close, at first I really didn't understand your math at all. (I didn't understand why you were changing the loan to 13500), but then I played around with the numbers a little bit, and I see where you are coming from now. It's hard for me to let go my dream of how much I had in mind to put towards retirement this year!

Gone Fishing

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Re: Mortgage with PMI vs. Investments? Advice, please!
« Reply #5 on: August 06, 2014, 08:05:22 PM »
Let us know what the mortgage people say about getting rid of it, it could change the math quite a bit...

JustTrying

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Re: Mortgage with PMI vs. Investments? Advice, please!
« Reply #6 on: August 06, 2014, 08:48:28 PM »
So Close...arg. Just looked at the email conversation between me and my loan guy (which took place before I took out the loan), and I have to wait two years from loan origination. But hey! That gives me a date to make sure I'm done by! :)

Gone Fishing

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Re: Mortgage with PMI vs. Investments? Advice, please!
« Reply #7 on: August 07, 2014, 08:05:46 PM »
No problem, an extra $1000 a month or so should do it! Put any extra in the 401(k)...

bdc

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Re: Mortgage with PMI vs. Investments? Advice, please!
« Reply #8 on: August 07, 2014, 10:40:27 PM »
You need to include taxes in the calculations -- which is hard to do without knowing tax brackets.

TomTX

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Re: Mortgage with PMI vs. Investments? Advice, please!
« Reply #9 on: August 08, 2014, 05:19:40 AM »
Yeah, PMI is pretty awful. When we bought this house, we avoided PMI by getting a 80% conventional loan and a 10% 2nd at a couple points higher interest. When the prior house sold ~6 months later, we paid off the 2nd.

JustTrying

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Re: Mortgage with PMI vs. Investments? Advice, please!
« Reply #10 on: August 14, 2014, 07:55:59 AM »
You need to include taxes in the calculations -- which is hard to do without knowing tax brackets.

bdc, do you mean to determine whether it's better for me to put my money into tax-deferred accounts? You're right on point with that! We are at the point in which we'd be in a different tax bracket if we didn't put enough into tax-deferred accounts.

Gone Fishing

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Re: Mortgage with PMI vs. Investments? Advice, please!
« Reply #11 on: August 14, 2014, 08:22:51 AM »
You need to include taxes in the calculations -- which is hard to do without knowing tax brackets.

bdc, do you mean to determine whether it's better for me to put my money into tax-deferred accounts? You're right on point with that! We are at the point in which we'd be in a different tax bracket if we didn't put enough into tax-deferred accounts.

Good point, straddling a bracket could make a significant difference...