Author Topic: Pay mortgage down to eliminate PMI?  (Read 10290 times)

jordand1986

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Pay mortgage down to eliminate PMI?
« on: September 06, 2014, 02:42:51 PM »
Afternoon ladies and gentlemen. This is my first post in the forum. I discovered the MMM website about a month ago and am pleased to see other people living life like I do. I have always been a saver, diyer, and expense minimizer. After going to grad school and then a 1 year stint with Americorp I took my first job earning a decent salary in December 2011. I graduated college and grad school with no debt, but do feel like I am a little behind in the retirement asset department. I am 28, have about $75,000 in cash and retirement funds (mostly retirement funds). After a bonus I will make roughly $60,000 this year and am on track to save between 40% to 50% of my after tax income. I will teeter between the 25%/15% tax bracket depending on how I finish the year out investing in my 401K. No debt other than a 15 year home mortgage I took out two years ago with a current balance of $85,181 and rate of 2.99%. Now that we have the run down on where I am currently, I am seeking some advice.

My mortgage has monthly PMI cost of $44.01. If I pay the mortgage down by $5,101.38; I will be under 80% loan to value and can eliminate my PMI payment. It is scheduled to reach 80% in exactly a year with normal payments so I would save $528.12 in PMI and $152.53 in interest over the next year by paying this off.  That is a $680.65 return or 13.3%.

My question is, how can I evaluate whether to pay down the mortgage or invest the money in low cost index funds? My initial thoughts are that paying it into the mortgage is a sure win, while investing in stocks might be better in the long run as I can take advantage of compounding (as the PMI is scheduled to end in a year I will only benefit from interest savings in the years after).

I would likely try and ream my loan if I paid it down, so I can keep the favorable rate for the full term of the loan and invest the difference in payment amount, as opposed to having the loan pay off early.

Thanks so much for the help.

t-rymz

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Re: Pay mortgage down to eliminate PMI?
« Reply #1 on: September 06, 2014, 02:47:14 PM »
Paying down the mortage makes the most sense. An index fund will probably pay 9-10% over the long term. A return of 13% to get out of the PMI is AWESOME. Take some of the extra cash you have and do it now.

When you're down, roll the extra $44 per month into a Roth. Retire happily :)

sandandsun

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Re: Pay mortgage down to eliminate PMI?
« Reply #2 on: September 06, 2014, 03:08:20 PM »
+1 for Pay to get out of pmi...

tracylayton

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Re: Pay mortgage down to eliminate PMI?
« Reply #3 on: September 06, 2014, 03:33:16 PM »
I was planning to do the same thing, but when I called my lender, they explained that my mortgage had to be seasoned for 5 years before the mortgage insurance could be eliminated. My loan is a 30 year FHA, so that might be the difference. On newer FHA loans, the mortgage insurance is for the entire life of the loan. Mine is $140 per month, so I can't wait to get rid of it!

starterstache

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Re: Pay mortgage down to eliminate PMI?
« Reply #4 on: September 06, 2014, 04:05:45 PM »
I was planning to do the same thing, but when I called my lender, they explained that my mortgage had to be seasoned for 5 years before the mortgage insurance could be eliminated. My loan is a 30 year FHA, so that might be the difference. On newer FHA loans, the mortgage insurance is for the entire life of the loan. Mine is $140 per month, so I can't wait to get rid of it!

The FHA equivalent of PMI is actually called "MIP" (Mortgage Insurance Premium).  As you stated, the older FHA loans allow you to remove the MIP after 5 years, provided the LTV (loan to value) ratio is 78% or less of the properties value.  Usually the bank will allow you to pay for a new appraisal and use that value for the LTV, once you hit the 5 year mark.  Note:  Banks won't usually remove the MIP automatically at the 5 year mark -  you have to call and specifically request to have it removed.

Like you said, newer FHA loans have MIP instituted for the life of the loan - not to mention the percentage has gone up tremendously.  I think now the MIP is 2-3x what it was when I took out my FHA loan 6 years ago. 

Best of luck!

-Brandon

tracylayton

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Re: Pay mortgage down to eliminate PMI?
« Reply #5 on: September 06, 2014, 06:41:23 PM »
Thanks, Brandon!

MayDay

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Re: Pay mortgage down to eliminate PMI?
« Reply #6 on: September 06, 2014, 07:46:45 PM »
We have the same plan.  We called Wells Fargo (who holds our mortgage) and for us the choices were:

1.  Send in a check for XXX$, to pay down to 80% of original purchase price, anytime we want.
2.  Wait until the loan is 2 years old, pay for an appraisal ourselves, and if it appraises for enough, they will remove the PMI without us having to pay down the loan. 

We plan to do #1, as #2 carries the risk that you don't appraise high enough, and thus wasted the money on the appraisal.

clarkm04

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Re: Pay mortgage down to eliminate PMI?
« Reply #7 on: September 06, 2014, 09:20:01 PM »
Contact your lender before proceeding.

Many require an appraisal to eliminate PMI.  Our's cost $450 dollars.

Try to discern all the costs before proceeding, since it might not be worth it if it'll be removed in a year.

Also, most mortgages state 78% from original mortgage schedule.  If you overpay, you have to send them a letter indicating you want the PMI when you reach 80% by the original mortgage schedule or by overpayment.

dbanta

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Re: Pay mortgage down to eliminate PMI?
« Reply #8 on: September 06, 2014, 10:31:14 PM »
I have a Wells Fargo mortgage.  To get rid of my PMI I actually have to pay the loan off to 78% to remove it.  I called to remove the PMI once I hit 80% and they said I had to wait until I hit 78%. 

jordand1986

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Re: Pay mortgage down to eliminate PMI?
« Reply #9 on: September 07, 2014, 12:13:15 AM »
My PMI automatically ends at 78%, but I can request to stop after 80%. Still not sold that it is the best move as it only eliminates one year of PMI, and will only "earn" me 2.99% after the first year.

Bateaux

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Re: Pay mortgage down to eliminate PMI?
« Reply #10 on: September 07, 2014, 01:53:24 AM »
I really hate bankers.   They continue to write loans to the uninformed with PMI.  I wish it were illegal to insure a loan.  Nothing but pure profit to the blood suckers.  Your mortage is so small and your income high enough to just get rid of the whole thing.   Mathematically it makes sense to invest after paying down to sub PMI level, especially tax deferred accounts.  I'm just a debt hater though.  I'd knock that little mortage out the park quick and be debt free.

TomTX

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Re: Pay mortgage down to eliminate PMI?
« Reply #11 on: September 07, 2014, 06:46:46 AM »
Just make sure putting cash into the mortgage instead of the 401(k) doesn't put you over the line into the 25% income tax bracket. That would basically be a 10% penalty.

jordand1986

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Re: Pay mortgage down to eliminate PMI?
« Reply #12 on: September 07, 2014, 08:09:31 AM »
I don't hate debt perhaps as much as I should. But as you have made mention, compared to my income my debt level is relatively small. When I bought the house I had enough money for a full down payment. I requested a conventional mortgage with 5% down and for whatever reason they approved it. I put the pen to paper and took a chance that the returns on putting the money in investments would outpace the savings. I ran the math this morning again and was correct. My 401K has returned an annualized return of 20.9%. While the $20,020 down would have saved $1,037 in PMI over that time and $1,197 in simple interest. for an annualized savings of 5.7%.

clarkm04

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Re: Pay mortgage down to eliminate PMI?
« Reply #13 on: September 07, 2014, 09:57:33 PM »
My PMI automatically ends at 78%, but I can request to stop after 80%. Still not sold that it is the best move as it only eliminates one year of PMI, and will only "earn" me 2.99% after the first year.

Banks consider the 78% from your original payment schedule.  Let's say on your original schedule when you closed 78% would be in 8 years from signing.  If you overpay and get to 78% in 4 years, it DOESN'T automatically remove.  Your mortgage documents probably sneakily state "78% of original schedule". You have to file papers/call and fulfill their additional requirements (appraisal, etc)  to remove it.

Banks love PMI since it's a nice service charge they get for almost no effort.

Ensure to read your mortgage documents and when you hit 80% to contact Wells Fargo and figure out exactly what they want before committing.

Sometimes it's fairly easy and sometimes it's not.

jordand1986

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Re: Pay mortgage down to eliminate PMI?
« Reply #14 on: September 08, 2014, 08:08:28 AM »
Yes, I understand that paying to 78% early does not automatically remove PMI. I read every line of my mortgage docs at closing. I can request PMI to be eliminated after my loan balance reaches 80% LTV regardless of the original schedule. My loan is not with Wells Fargo, must have been someone else in the thread.

Heart of Tin

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Re: Pay mortgage down to eliminate PMI?
« Reply #15 on: September 08, 2014, 09:19:49 AM »
My PMI automatically ends at 78%, but I can request to stop after 80%. Still not sold that it is the best move as it only eliminates one year of PMI, and will only "earn" me 2.99% after the first year.

Are you planning to pay your mortgage off early or do you expect to keep it for the full term? How likely is it that you would move and gain value from the equity in your house earlier than the mortgage would otherwise be paid down?

If you eliminate PMI now and pay off the mortgage or otherwise access the extra equity within six years, then the money spent eliminating PMI should "earn" above 5% annually during that time, which is a decent guaranteed, short term return. The longer that money remains trapped in equity, the closer that return will get to 2.99%. If you plan to sell the house or payoff the mortgage relatively soon, eliminate PMI now. If you plan to pay off the mortgage slowly, then don't bother; your $5,100 would probably be better off in an index fund during the term of your mortgage.

jordand1986

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Re: Pay mortgage down to eliminate PMI?
« Reply #16 on: September 08, 2014, 09:36:13 AM »
My PMI automatically ends at 78%, but I can request to stop after 80%. Still not sold that it is the best move as it only eliminates one year of PMI, and will only "earn" me 2.99% after the first year.

Are you planning to pay your mortgage off early or do you expect to keep it for the full term? How likely is it that you would move and gain value from the equity in your house earlier than the mortgage would otherwise be paid down?

If you eliminate PMI now and pay off the mortgage or otherwise access the extra equity within six years, then the money spent eliminating PMI should "earn" above 5% annually during that time, which is a decent guaranteed, short term return. The longer that money remains trapped in equity, the closer that return will get to 2.99%. If you plan to sell the house or payoff the mortgage relatively soon, eliminate PMI now. If you plan to pay off the mortgage slowly, then don't bother; your $5,100 would probably be better off in an index fund during the term of your mortgage.

Ah, that is why I came here, some insight into things I haven't thought about on this topic. My initial plan, and the reason I took a 15 year mortgage was to pay as little in interest as possible. I was planning on paying to loan off within 7 years. When the market started to look better I decided that I would milk my 2.99% fixed rate for the full life of the loan. No plans to pay it off or move in the foreseeable future. If I were to move, I would keep the home and rent it.

eyePod

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Re: Pay mortgage down to eliminate PMI?
« Reply #17 on: September 08, 2014, 09:52:10 AM »
I was planning to do the same thing, but when I called my lender, they explained that my mortgage had to be seasoned for 5 years before the mortgage insurance could be eliminated. My loan is a 30 year FHA, so that might be the difference. On newer FHA loans, the mortgage insurance is for the entire life of the loan. Mine is $140 per month, so I can't wait to get rid of it!

Ours isn't an FHA and it's illegal in my state for there to be any penalty (or stopping you from removing the PMI after you're below 78%), so check your state's laws about it.

Our plan is to keep paying off the mortgage ASAP and include the PMI payment as added principle payment every month after we are no longer in the 78% range. Will get us closer to paid off house and we won't miss the extra money each month. We want to pay off the house in under 10 years.


clarkm04

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Re: Pay mortgage down to eliminate PMI?
« Reply #18 on: September 08, 2014, 11:56:15 AM »
Yes, I understand that paying to 78% early does not automatically remove PMI. I read every line of my mortgage docs at closing. I can request PMI to be eliminated after my loan balance reaches 80% LTV regardless of the original schedule.

This is great!

Will they require an appraisal or other fees?  That's a fairly common tactic if you overpay.

jamal utah

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Re: Pay mortgage down to eliminate PMI?
« Reply #19 on: November 30, 2014, 01:23:56 PM »
We have the same plan.  We called Wells Fargo (who holds our mortgage) and for us the choices were:

1.  Send in a check for XXX$, to pay down to 80% of original purchase price, anytime we want.
2.  Wait until the loan is 2 years old, pay for an appraisal ourselves, and if it appraises for enough, they will remove the PMI without us having to pay down the loan. 

We plan to do #1, as #2 carries the risk that you don't appraise high enough, and thus wasted the money on the appraisal.

+1. I literally just did this last week. If the housing market is strong in your area you might be able to drop the pmi if you get a new appraisal. For us the appraisal cost like $360 and the end result was that we hit the 80% mark allowing us to drop the pmi without putting any additional mom into the mortgage.

bdc

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Re: Pay mortgage down to eliminate PMI?
« Reply #20 on: November 30, 2014, 08:40:19 PM »
Compare to refinancing - it might be just as easy as getting a PMI cancelation.

gatorNic

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Re: Pay mortgage down to eliminate PMI?
« Reply #21 on: November 30, 2014, 09:18:26 PM »
What do you think the percentage is of banks who require a time limit to drop PMI even if you reach 80%?  Its interesting to see some posters saying they have to wait atleast 2 years with Wells Fargo or 5 years with the FHA. 

jamal utah

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Re: Pay mortgage down to eliminate PMI?
« Reply #22 on: December 01, 2014, 01:31:06 PM »
What do you think the percentage is of banks who require a time limit to drop PMI even if you reach 80%?  Its interesting to see some posters saying they have to wait atleast 2 years with Wells Fargo or 5 years with the FHA.

As I understand it, it depends on the type of loan.  I think the new federal lending rules that came out after the mortgage crisis dictate the rules associated with PMI for all private loans.  Can anyone confirm this?

My best guess is that the main difference in the waiting time to drop PMI is whether it is a private loan or through a federal lending program, like FHA loans.  My guess is that US Bank loans and Wells Fargo loans, for example, would have the same requirements related to PMI, but perhaps someone in this field can confirm.

Tami1982

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Re: Pay mortgage down to eliminate PMI?
« Reply #23 on: December 01, 2014, 11:41:52 PM »
I have Home Street bank and a 30 year FHA loan that closed in 2012.  My stats: balance on home is $60,000.  Value is roughly $90,000.  Let's say $85,000.  That's still 70% equity. 

Here is what I was told by the bank when I tried to have PMI removed because I was past the 78% mark.
1) I have to pay it for five years of the loan no matter the value or loan balance.
2) The loan must be at 78% LTV based on the ORIGINAL APPRAISAL only. 
3) No payments of 30 or more days late in the last 12 payments.  (This one kills me.  So if I were to be late one payment, you can penalize me a YEAR with PMI payments?!)

It's in writing.  The only way to get out of it would be to refinance the house, which makes no sense for me fiscally with my low income situation and 3.25% interest rate.

According to them I am at 88.6%.  So I will just be sure that on that 60th payment/five year mark, I am below 78% or $53,174.  I figured out that I would need to submit an extra $3,380 in payments in the next three years. I don't want to pay one month more than I have to.  I might end up having to stick it a few extra months, with what else is going on with me financially, but I'm doing my best to make sure that goes away.

jordand1986

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Re: Pay mortgage down to eliminate PMI?
« Reply #24 on: October 15, 2015, 01:33:54 PM »
Thought I would update this. I decided not to pay the loan down early. My balance dropped under 80% from scheduled payments at the beginning of the month. I requested cancelation of PMI and it was canceled without any questions. It's good when things go as planned, other than the decline in the stock market. However, I care where it is in 10 to 15 years, not where it is today.

Tami1982

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Re: Pay mortgage down to eliminate PMI?
« Reply #25 on: October 26, 2015, 01:54:27 PM »
Woot!  So glad it came off with no hassle.  I've still a while yet to go, but I hope it is just as easy!