Author Topic: Payoff principal to remove PMI?  (Read 940 times)

Invester17

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Payoff principal to remove PMI?
« on: August 11, 2017, 10:24:06 AM »
Hello,

I currently have a mortgage ($383,000) and the original appraised value is $440,500. I'm currently at 87% LTV. I've been told my my lender if I paid $40,000 +/- a bit then my PMI would be removed. This would be $187 a month saved or $11,220 (PMI expires Feb. 2023, if I make standard payments of $2,687). I would also save on interest over the life of the loan and bring my mortgage to $2,500 per month.

So the ask here is - what would you do?

Would you pay $40,000 for an instant return of $11,220 + reduced per month risk + reduced interest (even if only a little) over the life of the loan.

Or would you pay more $3200 a month (currently I pay $550 extra per month) and have the PMI get naturally removed in 2019. The rest of the money would be invested into a S&P 500 index otherwise (it would not be sitting in savings).

Thanks!
« Last Edit: August 11, 2017, 10:40:35 AM by Invester17 »

Bracken_Joy

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Re: Payoff principal to remove PMI?
« Reply #1 on: August 11, 2017, 10:44:35 AM »
Here is a thread I started, where some very smart people weighed in with some very good math =)
https://forum.mrmoneymustache.com/ask-a-mustachian/getting-rid-of-pmi-what-%27return%27-would-i-get-for-paying-down-my-mortgage/
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bender

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Re: Payoff principal to remove PMI?
« Reply #2 on: August 11, 2017, 11:31:50 AM »
That looks like a solid return.  If you've got the 40k - pay it.

frugaliknowit

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Re: Payoff principal to remove PMI?
« Reply #3 on: August 11, 2017, 11:50:31 AM »
The return sounds great, however, if they are telling you they would do that WITHOUT an appraisal, definitely get it in writing before shelling out all of that cash (only to be told something like, "...ahhh the LTV is too high based on yada, yada...).  If you need an appraisal, find out the particulars of who they qualify, etc. and what they will charge you.  If you need to spend money on an appraiser, you might want to research recent comparable sales to make sure you are "in the ballpark".   

Invester17

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Re: Payoff principal to remove PMI?
« Reply #4 on: August 11, 2017, 12:52:12 PM »
Agreed. I asked for it and got it in writing that it would be approved (by someone I trust / family friend). So I'd assume if I pay the 40k that it will be removed. The question now is whether its worth it or not.

Monkey Uncle

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Re: Payoff principal to remove PMI?
« Reply #5 on: August 12, 2017, 04:45:16 AM »
The return on your 40,000 investment works out to be a CAGR of 4.6% per year ($40k principal, 11,220 gain over 5.5 years - calculator here: http://www.moneychimp.com/calculator/discount_rate_calculator.htm

Are you likely to get more than a 4.6% annualized return out of the $40k by leaving it where it is now?
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Invester17

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Re: Payoff principal to remove PMI?
« Reply #6 on: August 12, 2017, 05:41:15 AM »
Maybe. But this is garunteed. It also comes with the benefit of reduced mortgage payments and interest savings on the life of the loan.

Monkey Uncle

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Re: Payoff principal to remove PMI?
« Reply #7 on: August 12, 2017, 07:15:03 AM »
You should add the interest savings to the 11,220 PMI savings and recalculate the CAGR.  Some people follow the rule of thumb that a guaranteed 5% return is better than the uncertain possibility of a higher return by leaving the money invested in stocks.  This is especially true for shorter time periods, which make the expected return of a stock investment a bit of a crap shoot.  Once you know your return for the payoff, you really just have to go with your gut because you can't know how much return you're actually going to get from leaving the money invested.
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Invester17

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Re: Payoff principal to remove PMI?
« Reply #8 on: August 13, 2017, 07:53:08 AM »
Using the calculator provided on the lenders portal (with all of my information inputted) it says I'll save $39,670 over the life of the loan by paying the $40,000 upfront.

$230,624 vs. $190,954 = $39670

I also miss calculated the PMI removal date. Based on Feb. 2023 expiration date (based on normal payments) if I paid upfront it would save me $12,155 ($187 x 65 months).

For a total savings of: $51,825

Seems like a no brainer eh? or am I missing something. The only downside here is the 40k will be locked into the mortgage. This isn't a big deal for me though since I have no short term plans for this house.

« Last Edit: August 13, 2017, 08:12:31 AM by Invester17 »

Gone Fishing

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Re: Payoff principal to remove PMI?
« Reply #9 on: August 13, 2017, 08:13:21 AM »
What is your current mortgage interest rate? 

Is your PMI and/or mortgage interest tax deductible?

What is your maximum, "last dollar" tax rate including federal, state, and possibly local taxes. 

Where is your $40k now? 

Are there any tax implications associated with liquidating the $40k investment?

How are the current earnings from your $40k taxed?

Invester17

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Re: Payoff principal to remove PMI?
« Reply #10 on: August 13, 2017, 10:20:30 AM »
What is your current mortgage interest rate? 

4%

Is your PMI and/or mortgage interest tax deductible?

Only the mortgage interest

What is your maximum, "last dollar" tax rate including federal, state, and possibly local taxes. 

I don't understand this concept.

Where is your $40k now? 

23k in Employer ESPP, rest is savings (not emergency fund

Are there any tax implications associated with liquidating the $40k investment?

Yes, some of the 23k from the ESPP will be taxed. However, this should be offset when I put in all my deductions. Based on another thread I have active I need to sell this anyway.

How are the current earnings from your $40k taxed?

Quarterly dividends, ESPP the rest is divideds through a savings account

Gone Fishing

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Re: Payoff principal to remove PMI?
« Reply #11 on: August 13, 2017, 11:10:56 AM »
I come up with an immediate return of 9.6% by getting rid of the PMI.  $187x12 months=Annual PMI is $2244.   $40,000x.04=Annual interest is $1600.  Total cost of borrowing the $40k is $3844/yr or 9.6%.

As the PMI payment is fixed, the cost of borrowing only gets worse if you pay down the loan incrementally towards $343k.  For example, at $363k, the cost of the remaining $20k would be $2244 of PMI + $800 interest / $20,000 needed to eliminate PMI which results in an effective cost of 15.22%, only strengening the case for paying the loan down and eliminating PMI in one swift move.. 

Paying it down seems like a no brainer, just be aware that you will lose around $1600 in deductible interest, which will probably not be completely off set by a reduction in investment income, especially if the dividends are qualified for special tax treatment.  Probably not enough to make a difference in your case.  But important to understand, especially as the numbers grow over time.

 Your "last dollar" tax rate, also called your marginal tax rate, is the rate that your last dollar of income is taxed.  For example, your last dollar of income might be taxed 15% on the federal level, 5% on the state level and 2% on the local level for a combined marginal tax rate of 22%.  Good to know when you are making decisions with tax implications.
« Last Edit: August 13, 2017, 11:17:04 AM by Gone Fishing »

Invester17

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Re: Payoff principal to remove PMI?
« Reply #12 on: August 13, 2017, 11:50:14 AM »
Very well written, thank you. Sounds like a sound investment.

Dicey

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Re: Payoff principal to remove PMI?
« Reply #13 on: August 13, 2017, 06:58:46 PM »
I'd rather have the $40k invested in my control, but I've been at the game a lot longer, 'cuz I'm old. Rates seem to be dropping, why not watch the market closely for a few weeks and see if you can score something at around 3.5%. Maybe a 15 year fixed? Your payments might be a little bit higher, but you could bridge any shortfall you can't cash flow with dribs and drabs from the $40k (Pro tip: cash flow it. You're mustachian, you can work it.)
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Invester17

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Re: Payoff principal to remove PMI?
« Reply #14 on: August 14, 2017, 07:21:25 AM »
A few things...

1) I prefer to pay extra and have a safety net by not having higher mortgage payment.

2) The unit is considered a "condo" even though it's a single family home. Every time I've checked I have not been able to get better than 4%.

Dicey

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Re: Payoff principal to remove PMI?
« Reply #15 on: August 14, 2017, 08:43:14 AM »
A few things...

1) I prefer to pay extra and have a safety net by not having higher mortgage payment.

2) The unit is considered a "condo" even though it's a single family home. Every time I've checked I have not been able to get better than 4%.

Re #2 Owner-occupied condo, townhouse, SFH all get the same rates in my market. Are you positive about this? Where are you located  (in general)?
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Invester17

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Re: Payoff principal to remove PMI?
« Reply #16 on: August 14, 2017, 06:28:17 PM »
Virginia (coastline), what I was told is that a condo is greater risk and therefore a higher interest rate.