Author Topic: Pay Down Mortgage to Remove PMI?  (Read 22568 times)

The Dutchman

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Pay Down Mortgage to Remove PMI?
« on: July 02, 2013, 08:21:20 AM »
I purchased a house this year using a HUD 203k loan which is a sweet deal if you want to buy a fixer upper as they finance renovations in your mortgage.  That is a whole different post.  Anyway, I put 3% down on a 90k purchase.  One thing I have noticed that the PMI is outrageous sitting at around 94 $/month.  The interest rate I got was 4% for your reference. 

My question is.  Should I try my damndest to pay down 15k to get 20% equity quickly?  At that point (20% equity) my PMI will be will be removed from my bill.  So I will have an additional 94 $/m (1,128 $/y) and I will have "invested" in my house 15k with a guaranteed 4% return.  Not 100% guaranteed but you know what I mean.

Let me know what you guys think. 

As a side note I will not be implementing this plan for at least another year as I am going after student loans I have which are 5% and greater.  See plan here if you are interested: http://www.mrmoneymustache.com/forum/throw-down-the-gauntlet/16k-paid-down-in-12-months-(student-loan)/

SunshineGirl

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Re: Pay Down Mortgage to Remove PMI?
« Reply #1 on: July 02, 2013, 08:49:01 AM »
In round numbers, that $94/month adds about one percent to the interest rate you're paying (rather, money you'll never get back).

Your plan sounds good, considering you're using your extra money to pay off higher-interest-rate loans.

markstache

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Re: Pay Down Mortgage to Remove PMI?
« Reply #2 on: July 02, 2013, 10:48:49 AM »
I purchased a house this year using a HUD 203k loan...

My FHA loan requires 5 years of PMI payments, even if the LTV drops below 80%. It was still worth it for other reasons, but that clause irked me when I learned about it.

aj_yooper

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Re: Pay Down Mortgage to Remove PMI?
« Reply #3 on: July 02, 2013, 11:02:23 AM »
Check to see if you can zap the PMI as soon as you get to 80%.  If you can, then you are saving the 4% + monthly PMI necessary to reach 80%, which, to me, is a good choice.  If you have to wait, say 5 years, then you have to decide if you have alternate better uses of your investment money. 

RewardTraveler

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Re: Pay Down Mortgage to Remove PMI?
« Reply #4 on: July 02, 2013, 11:05:35 AM »
If you can get out of PMI before 5 years, then I would go for it ahead of student loans.  Your interest rate on the PMI is actually 7.5% ($1,128 / $15,000) plus 4% standard interest rate, 11.5% in total.

Frankies Girl

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Re: Pay Down Mortgage to Remove PMI?
« Reply #5 on: July 02, 2013, 11:29:18 AM »
No idea if this is common practice, but when I requested our PMI removed as we'd hit the 20% and then some, the mortgage company said the only way they'd do it early was if we paid $300 for a top to bottom home inspection to make sure that our home's value wasn't less than the cost of the loan. This is despite us paying early, never missing a payment and paying off something like 30% of the original loan already - and with home sales holding steady or climbing in my neighborhood (confirmed through realty sales).

If it had been on the actual amortization schedule for when it would have been below 20%, PMI would have been automatically removed, but for some reason, they wanted an inspection if it was paid down early? Never made sense to me...

In any case, you should find out if there is any inspection fee crap for getting that removed early and figure that into the cost as well, but with you paying that much in PMI, it's probably still worth it if you can get it down in a year or two.

velocistar237

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Re: Pay Down Mortgage to Remove PMI?
« Reply #6 on: July 02, 2013, 12:00:05 PM »
It's common for a bank to require an appraisal to remove PMI ahead of schedule, but it's not required by law. Our bank didn't do it, but I think the loan officer might have been confused. The laws governing PMI are a little hard to follow, and so is the policy documentation that gets derived from it.

The Dutchman

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Re: Pay Down Mortgage to Remove PMI?
« Reply #7 on: July 03, 2013, 06:28:56 AM »
I purchased a house this year using a HUD 203k loan...

My FHA loan requires 5 years of PMI payments, even if the LTV drops below 80%. It was still worth it for other reasons, but that clause irked me when I learned about it.

That is BS.  I have asked the question of how long I need to pay PMI and what the process is once I have 20% equity.  No one can ever read all the documents they put in front of you at closing; but I don't remember seeing that. 

If you can get out of PMI before 5 years, then I would go for it ahead of student loans.  Your interest rate on the PMI is actually 7.5% ($1,128 / $15,000) plus 4% standard interest rate, 11.5% in total.

I didn't get the math the first time I looked at it; however, that makes sense.  Basically for a 15k investment I could save 1.1k for 9 years in PMI alone.  Basically I will own 20% by 2022 at which point my PMI will fall off.  So if I can pay it off in a year (this starts after I pay down my student debt so really 2 years from now) then I can have 7 additional years without PMI which would be a total savings of 7.7k. 

The Dutchman

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Re: Pay Down Mortgage to Remove PMI?
« Reply #8 on: July 03, 2013, 06:38:01 AM »
PS - Here is my mortgage calcs for anyone who is interested.  http://www.mlcalc.com/#mortgage-92187-3-30-4-3250-950-1.26-6-2013-year  For some reason all the values I type in are saved in this link except the PMI.  So you will need to manually type in a PMI of 1.26 when the link opens and re calc. 

Here are the screen shots of the calcs. 





velocistar237

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Re: Pay Down Mortgage to Remove PMI?
« Reply #9 on: July 03, 2013, 09:44:30 AM »
My FHA loan requires 5 years of PMI payments, even if the LTV drops below 80%. It was still worth it for other reasons, but that clause irked me when I learned about it.

That is BS.  I have asked the question of how long I need to pay PMI and what the process is once I have 20% equity.  No one can ever read all the documents they put in front of you at closing; but I don't remember seeing that.

The only way to sort this out is to ask your lender. IANAL, but I do know that HUD 203(k) loans are FHA loans, and FHA loans are exempted from the Homeowners Protection Act of 1998, which governs the cancellation of PMI, and that the minimum period for "Mortgage Insurance Premium" under an FHA loan is 60 months, unless the loan is a 15-year loan.

You could look into an FHA Streamline Refinance.

Luigi

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Re: Pay Down Mortgage to Remove PMI?
« Reply #10 on: July 04, 2013, 02:35:26 PM »
I purchased a house this year using a HUD 203k loan...

My FHA loan requires 5 years of PMI payments, even if the LTV drops below 80%. It was still worth it for other reasons, but that clause irked me when I learned about it.
Yeah, mine, too.  I only JUST found that out.  My mortgage officer didn't know, either, I got the letter in the mail Monday or Tuesday, after spending a lot of money (that wouldn't have gone anywhere else, likely) paying down the principal. 

One more thing I found out and this isn't much, is that for me, I had to get my loan below 78%, not 80%.  The 80% LTV was for a conventional loan, but removal of PMI is 78% LTV. 
Weird thing is, in their reply to me about my rejection (because my loan is not 4 years, yet), they gave me my 78% as being higher than that percentage of my sale or appraisal price by about $1000.  Just funny to me.

So it's an FHA thing, not just the lender, that demands 5 years of on-time payments?  Thanks for that info.

edit to add: My mortgage broker told me one of the last times I spoke with her, that any new FHA loans can't remove PMI early.  She implied for the life of the loan, but I believe it's for the life of the PMI of the loan.  Not that I've looked into that.  So be aware of that, too.
« Last Edit: July 04, 2013, 03:08:49 PM by Luigi »

MustacheCowboy

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Re: Pay Down Mortgage to Remove PMI?
« Reply #11 on: July 04, 2013, 04:21:47 PM »
I used to be a mortgage loan officer. PMI rules can vary by state for conventional loans (read non FHA). But traditionally if your balance reaches 80% of the homes original appraised value you can request that the lender drop PMI. Most lenders require a "seasoning requirement" of 2-5 years, meaning your loan is 2-5 years old. In most cases if you reach 75% of the original appraised value the lender doesn't have the seasoning requirement. If you pay the bank for a new appraisal and the value of your home increased to where you have 20% equity they will typically consider dropping PMI but again subject to the seasoning requirements. Your best bet is to get that 25% equity. You could also refi out of it if it makes sense to do so.

velocistar237

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Re: Pay Down Mortgage to Remove PMI?
« Reply #12 on: July 04, 2013, 05:32:53 PM »
edit to add: My mortgage broker told me one of the last times I spoke with her, that any new FHA loans can't remove PMI early.  She implied for the life of the loan, but I believe it's for the life of the PMI of the loan.  Not that I've looked into that.  So be aware of that, too.

I saw this. The new time period is 11 years. Beware FHA loans, and always read all of your paperwork.

Luigi

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Re: Pay Down Mortgage to Remove PMI?
« Reply #13 on: July 05, 2013, 05:21:32 PM »
edit to add: My mortgage broker told me one of the last times I spoke with her, that any new FHA loans can't remove PMI early.  She implied for the life of the loan, but I believe it's for the life of the PMI of the loan.  Not that I've looked into that.  So be aware of that, too.

I saw this. The new time period is 11 years. Beware FHA loans, and always read all of your paperwork.
Yeah, that is bs, the 11 years.  Of course, I feel the same about 5 years.

I don't remember this being in my paperwork, either, but I wouldn't be surprised.  I can't say I read all of it, though I tried.  After some time, sometimes you just can't focus on it, anymore (at least, I couldn't

The Dutchman

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Re: Pay Down Mortgage to Remove PMI?
« Reply #14 on: July 08, 2013, 06:22:43 AM »
Who can read all that paper work.  Even if you sat down for a week your head would be spinning with all the legal language they use. 

Anyway, you guys are correct.  I need to be paying into my PMI for 5 years and then need to get to 78% which kind of sucks.  Fine print kills.

Also, you are correct it has recently changed (last month or the month prior) that the PMI will last the length of the loan.  Not sure if that is the 11 years (when you get to 78%) or the full life of the loan. 

I guess I will be looking to pay down a bunch and refinance in a couple of years to reduce that payment. 

nawhite

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Re: Pay Down Mortgage to Remove PMI?
« Reply #15 on: July 08, 2013, 09:31:34 AM »
About reading all of your mortgage paperwork, request all of the paperwork early and read it over dinner for 2 or 3 days. If you don't think you'll have time to read it, pay a lawyer to read it, its relatively cheap compared to the other things you're paying for on the house.

I got hammered on getting a renter's deposit back after moving out once because I didn't read the lease completely. So now I have made a habit of reading every part of every contract I sign. It really is a skill that you get better at with practice so I was able to read all of my 96 page mortgage agreement in about 2 hours. After doing it a long time you start to realise what you need to read and what you don't. For instance I don't need to read the instructions for the Title Company's actuary. I do need to read the PMI info and the prepayment info.

I'm not a lawyer and don't follow the caselaw associated with it so I can't know whats enforcable, but I can know if it is reasonable or not and I usually complain when contracts aren't reasonable. (Had to get a clause amended in a lease once to allow my dog to pee on the grass. The contract as written said if he peed on the property, they could take him to the pound).

For instance, from my mortgage paperwork, I can request my PMI be taken off as soon as I reach 20% equity or the date I would reach 20% equity but only if I pay for an appraisal to prove the property hasn't decreased in value. My PMI will not be automatically removed until the originally scheduled date I would reach 22% equity.

So even if I pay off half my mortgage in the first year, I will still have PMI until I request for it to be removed and I pay for an appraisal.

jrs

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Re: Pay Down Mortgage to Remove PMI?
« Reply #16 on: July 08, 2013, 10:48:15 AM »

That is BS.  ...  No one can ever read all the documents they put in front of you at closing; but I don't remember seeing that. 


Whoa!!! stop right there.
Some of us ask for the final copy of the paper work days before signing. 

I read some 40 pages of closing documents, and two sets of HOA documents at about 80 pages each.  I didn't necessarily like all of the terms in my paperwork but I can comfortably say I read and understood them all. 

For your reference, I have a 5 year lock out on dropping PMI (negative), but the loan is assumable, which I feel is positive and helps to offset the PMI clause.

burly

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Re: Pay Down Mortgage to Remove PMI?
« Reply #17 on: July 08, 2013, 04:06:41 PM »
You can to a conventional with only 5% down... Why bother with FHA?

BC_Goldman

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Re: Pay Down Mortgage to Remove PMI?
« Reply #18 on: July 08, 2013, 08:43:59 PM »
Yeah, I saw the same thing when I dug out my loan paperwork over the weekend. Have an FHA. Scheduled to clear PMI after about 9 years but minimum of 5 years if I hit 78% early. Still something to shoot for as at the very least I can save four years of PMI payments. Unless I have to pay over the whole life of the loan. I'm unclear about that part. Also, I don't know if it's 5 years from purchase or from the beginning of the refi (I'm around 5 years owning now). Most likely starts from the refi so I still have 4.5 years to go.

velocistar237

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Re: Pay Down Mortgage to Remove PMI?
« Reply #19 on: July 09, 2013, 05:24:08 AM »
You can to a conventional with only 5% down... Why bother with FHA?

203k is for rehab work. A conventional loan won't work for that.

fiveoclockshadow

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Re: Pay Down Mortgage to Remove PMI?
« Reply #20 on: July 09, 2013, 07:53:58 AM »
Sorry for the slightly off-topic question - but my curiosity is piqued.

Why all the PMI?  In the distant past (pre-crash) a favorable option was 20% down on the first plus a HELOC for a second (with a total of say 5% down).  This avoided PMI, let you pay down the HELOC quickly at no penalty and of course you then have a ready made HELOC which has a liquidity advantage (of course not perfectly liquid, but much more liquid than paying down a first mortgage).  Naturally the HELOC rate was higher than your first, but often you came out ahead or equal to PMI.

I'm guessing this option disappeared and hasn't surfaced again in the market?  Probably not surprising if that is the case, presumably the HELOCs got burned worst of all in the crash?  A quick search seemed to show HELOCs with LTVs up to 90% or even 95% without to horrible an interest rate premium, so they seem to still exist.

Anyway, this technique now out of vogue or ineffective?

velocistar237

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Re: Pay Down Mortgage to Remove PMI?
« Reply #21 on: July 09, 2013, 08:08:09 AM »
I'm guessing this option disappeared and hasn't surfaced again in the market?  Probably not surprising if that is the case, presumably the HELOCs got burned worst of all in the crash?  A quick search seemed to show HELOCs with LTVs up to 90% or even 95% without to horrible an interest rate premium, so they seem to still exist.

Anyway, this technique now out of vogue or ineffective?

This article (NYT) suggests that the piggyback loan went away for a while after the bubble but is now back for qualifying buyers.

DoubleDown

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Re: Pay Down Mortgage to Remove PMI?
« Reply #22 on: July 09, 2013, 08:10:34 AM »
I'm no authority, but it appeared that following the housing crash banks would no longer provide 2nd loans or HELOCs to cover a less-than-20% down payment in order to avoid PMI. And, you could not even do a HELOC simultaneously with a conventional loan, you first had to wait for the conventional loan to close, THEN you could start the HELOC application.

Some of those restrictions seem to have relaxed a bit in the last year or two, as several banks are now using not quite as strict criteria.

fiveoclockshadow

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Re: Pay Down Mortgage to Remove PMI?
« Reply #23 on: July 09, 2013, 08:32:47 AM »
@velocistar - Wow!  What an excellent and apropos article for my question!  I honestly Googled before asking, but now that I think of it I should have date limited my search - was saturated with results from pre-2008.  Again, thanks that was the perfect answer to my question.

@DD - Yeah, the lending environment was extreme for a long time after the crash.  By dumb luck (job relocation, not really under our control) we sold in early 2008, watched the world burn while renting, and in 2010 when we knew we were going to be in our new location for a long while bought again.  What a difference a few years made.  Jumbo-loans apparently didn't even exist again until late 2009.  In early 2010 a jumbo required at least 25% down, outstanding credit, and so much asset padding and income you almost didn't need the loan!  We ended up nudging our down payment even a little higher as that got it into conforming territory with better rates.

TL;DR - For those not following the NYT link, summary is piggyback HELOCs to avoid PMI are back again if you have good credit, so are firsts with 5% or 10% down and FHA fees are increasing significantly.  That means fewer people will do FHA now.  These changes are quite recent and prior to that FHA was one of the few ways to go low down payment.  So we will see lots of people with FHA from the past few years asking this PMI question, but for new buyers the advice should be to dodge FHA if you can.  Separate from the down payment issue FHA may still be your only option if debt-to-income ratio is poor - but you'll be paying a premium to do this as FHA fees are growing.

MustacheCowboy

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Re: Pay Down Mortgage to Remove PMI?
« Reply #24 on: July 09, 2013, 04:32:27 PM »
Piggybacks are back for those with excellent credit and strong repayment ability (debt to income ratios of 36% or less). Some folks choose FHA because of the more lax ratios (41% or higher).

MoneyLifeandMore

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Re: Pay Down Mortgage to Remove PMI?
« Reply #25 on: July 09, 2013, 08:39:17 PM »
Who can read all that paper work.  Even if you sat down for a week your head would be spinning with all the legal language they use. 

Anyway, you guys are correct.  I need to be paying into my PMI for 5 years and then need to get to 78% which kind of sucks.  Fine print kills.

Also, you are correct it has recently changed (last month or the month prior) that the PMI will last the length of the loan.  Not sure if that is the 11 years (when you get to 78%) or the full life of the loan. 

I guess I will be looking to pay down a bunch and refinance in a couple of years to reduce that payment.

I read every single line of my loan paperwork, sometimes multiple times, and made sure to ask questions to make sure I understood what I was signing. I do have an accounting background so that helped out a lot, but if you're signing anything saying you're going to pay back, in many cases, over a six figure amount of money, you really need to understand the whole document. If you don't follow the contract you can get in a lot of trouble or find out about unintended consequences someone lied to you about to get you to sign the loan and get their commission. The paper is what you sign and go by, not whatever your loan officer says.

The Dutchman

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Re: Pay Down Mortgage to Remove PMI?
« Reply #26 on: July 10, 2013, 05:46:40 AM »
Now that I got the red ass for saying "who can read all that paper work" I will say I did read the entire document.  I got the bulk of it 5 days prior and skimmed through every page.  I am not sure how I missed the 5 year requirement; however, it would not have changed me signing.

As someone has stated I went FHA because I bought a house for 60k and put 33k into it.  With the FHA 203k loan the total loan is 93k when it is all said and done.  It is hard if not impossible to do this with a conventional loan. 

As a side note I also needed to go with FHA because they have lower requirements for credit.  I was not always Mustachian and it has haunted me.  That mistake will never happen again. 

velocistar237

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Re: Pay Down Mortgage to Remove PMI?
« Reply #27 on: July 10, 2013, 07:47:51 AM »
Would it be worth it to pay off the whole loan in less than 5 years?

The Dutchman

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Re: Pay Down Mortgage to Remove PMI?
« Reply #28 on: July 12, 2013, 06:25:17 AM »
Would it be worth it to pay off the whole loan in less than 5 years?

It might be worth it.  However, I don't have the cash flow to take on something like that.  The best I could do is pay down 10k per year...

corcoran

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Re: Pay Down Mortgage to Remove PMI?
« Reply #29 on: July 12, 2013, 08:03:36 AM »
I have time to read all the paperwork. When I signed I read it all in the office, before I signed. If you're willing to sign something that you will be committed to for 30years (insert your loan time here) I think you can sacrifice a few hours to understand what you're doing.

cbr shadow

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Re: Pay Down Mortgage to Remove PMI?
« Reply #30 on: July 12, 2013, 08:45:18 AM »
I read through most of the responses here to see if anyone posted what I'm about to say, so sorry if someone already mentioned this..

Look into what it actually takes to get rid of the PMI.  My wife and I did it recently and it was more complicated than I had hoped it would be.  The part that got us was the "after 5 years" part.  We had enough cash to bring to the table to have the 20% equity in the house, but we had refinanced just 1 year before, so the 5 year time limit is reset. It's 5 years from the signing of the loan documents.
What we ended up doing is bringing money to the table and refinancing into a conventional loan (not FHA).  That got rid of the PMI.  In order to refinance into a conventional loan you have to have 20% equity in your home though.

simonsez

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Re: Pay Down Mortgage to Remove PMI?
« Reply #31 on: July 12, 2013, 09:03:29 AM »
Now that I got the red ass for saying "who can read all that paper work"

Haha hilarious!  Thanks for making me choke on my soup!

The Dutchman

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Re: Pay Down Mortgage to Remove PMI?
« Reply #32 on: July 16, 2013, 02:36:36 PM »
...
What we ended up doing is bringing money to the table and refinancing into a conventional loan (not FHA).  That got rid of the PMI.  In order to refinance into a conventional loan you have to have 20% equity in your home though.

After talking to our loan agent this is what we will end up doing.  We need to wait a year from closing which is fine I have a year to pay off my student loans.  Lets hope the market climbs a little in the next year and we are able to get a little free equity in market appreciation.  Not holding my breath. 

As far as throwing down some cash to refinance I will just take the time to shop around.  My friend refinanced and it cost him $700.  My other friend refinanced and it cost him 3k.  So it sounds like you just need to find the right company and start negotiating... and read the fine print carefully. 

showzee

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Re: Pay Down Mortgage to Remove PMI?
« Reply #33 on: February 27, 2017, 01:22:15 PM »
If you can get out of PMI before 5 years, then I would go for it ahead of student loans.  Your interest rate on the PMI is actually 7.5% ($1,128 / $15,000) plus 4% standard interest rate, 11.5% in total.

You also need to take into consideration the tax deduction you get for mortgage interest, which can be substantial, maybe even more than $1,128/yr on average.

The_Pretender

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Re: Pay Down Mortgage to Remove PMI?
« Reply #34 on: February 27, 2017, 02:32:25 PM »
I thought you had to itemize your taxes to get this deduction to work for you.  Not knowing the specific tax/financial background of the OP.  If OP is Married Filing Jointly, then they would need to have itemized up to $17K before this could outweigh the $1K PMI.  Knowing this OP's original loan amount, interest paid on this would only get them 4-5K or just under a 1/3 of the way there.

Also, this post is ancient.  the OP could have remodeled this property and sold it for a large gain already and moved onto a new property...