Pay off PMI - Big goal, does it make sense

[cbr shadow]

My wife and I are in an FHA loan where we pay $215 in PMI every month.  We should have waited until we had 20% down on the home but we didn't so this is where we're at. 

Paid $221,000 for the home at 5.25% about 4 years ago
FHA Streamline refinance a few months ago for $207k @ 3.5%
Zillow says current price = $181k  OUCH

So we set a goal to get rid of our PMI, which costs us about $215/month, or $2580/yr. 
There are (2) ways to get rid of the PMI

1) Refinance into a conventional loan. To do this we'll have to show we have 5% equity in the home (bringing $35k to the table)  This gets rid of our PMI and brings the principal of the refinanced loan down to about $172,000.

2) After 5 years (that's 5 years from our refinance, which means 5 years from last month) if you have 20% equity in your home the bank must drop the PMI.


So does it make sense to bring the $35k to the table and refinance, or would I be better off investing that month in index funds and hoping the RE market comes back in the next 5 years so that I'll have 20% equity in the home?

I think the answer is to bring the $35k to the table and refinance, but I want to make sure I'm not being stupid about this.

What I'm thinking:  $35k invested in index funds getting 8% means = $51426 in 5 years.

Thoughts?
Thanks,
Ryan

[velocistar237]

You need to flesh out this scenario a little more and figure out the NPV for each option.

Investing $35K at 8% with 3.5% inflation for 5 years will get you

$35K*((1.08/1.035)^5-1) = $8300 (2013 dollars)

Getting rid of a $215/month payment at 3.5% inflation has an NPV of

$215*((1+0.035/12)^60-1)/(.035/12*((1+0.035/12)^60)) = $11818 (2013 dollars)

If you refi with a conventional and 5% equity, you'll still pay PMI until you get up to 20% equity. Your new PMI might be comparable to your old PMI. If you refi, you will pay less mortgage interest. To complete the refi scenario, subtract the NPV of the PMI you would pay on the new loan, subtract the refinance costs you would pay, and add the NPV of the mortgage interest you would avoid through having a lower balance.

There's a bit of variation in this scenario. Zillow is bad, so get a better opinion. Look at comps, for example, or talk to a real estate agent.

[Nate R]

I thought Federal law allowed you to have PMI removed if you could show you owe less than 78% or so on the house? (Via apprasial)? Not through a refi, I thought the PMI could be dropped?

[cbr shadow]

Nate, that's only half of it - you have you have 78% AND 5 years from opening the loan.  That's about $13,000 in PMI payments in my case.

[velocistar237]

FHA loans are special that way.

[cbr shadow]

Velocistar237 thanks for the math above - that's exactly what I was looking for!

[burly]

Not sure where you live, but for the bank I work for, PNC Bank, we do home equity loans, first liens up to 89.9% financing, up to 30 yr terms, with avg closing cost of ~$200 in PA. Appraisal is paid for by the bank.

Another option, thru PNC Mortgage is an 80/10/10. 80% Mortgage, 10% home equity piggy back, and 10% downpayment. This allows 10% down and no PMI. - PNC Mortgage does business in all 50 states.

Firstly, I believe Zillow is good for a rough idea, but they have no idea what the inside of your home looks like, I would say try your local bank to see if you can apply for a home equity, they'll often eat the appraisal price.

[sherr]

Nate, that's only half of it - you have you have 78% AND 5 years from opening the loan.  That's about $13,000 in PMI payments in my case.

Banks are *required* to drop the PMI if you have 22% equity and had 5 years on the loan, but they *may* drop the PMI anytime you have 20% equity. My FHA loan serviced through Bank of America did just that; I had only 20% equity and had only had the loan for 3 years. One polite phone call and the PMI was gone. They even accepted the original appraisal value of the home so I didn't have to get it re-appraised.

You can still do the math to figure out what's best for you, but I thought I'd let you know it's not necessarily as dire as you think.