The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: powersln on November 21, 2012, 08:40:31 AM
-
Quick background:
Married (both 25y/o) with one son.
52k year salary (wife stays home)
Assets:
Cash: $3,300.00
Car: $5,000.00
401k: $12,283
House: $83,000.00
Total: $103,583.00
Liabilities
Mortgage: $72,552 @ 3.865%
I will be getting a $10,000 bonus and I'm thinking of dumping some of that on the mortgage to remove PMI. Based on my background above, is this a good idea? Can you double check my math below?
80% LTV will be reached when the mortgage hits $66,400. (83,000 * .80 = 66,400 ).
Current mortgage is at $72,552, so I will need to pay $6,152 to get to 80% LTV. (72,552 - 66,400 = 6,152)
I pay $30.50 a month in PMI. Essentially by not paying down the mortgage to 80% LTV I am paying $30.50 a month to borrow $6,152.
12 months of PMI is $366.00 (30.50 * 12). So APR would calculate to 366/6152 or approx 5.9%.
Also, if I payed down the mortgage by $6,152 I would not pay regular mortgage interest on that money. Since my interest rate is 3.865%, I'm essentially paying 3.865% + 5.9% = 9.765%
This is a no brainer right? I should pay the mortgage down $6,152 because I'm essentially paying 9.765% on that money.
-
One thing you will want to check is that many mortgage lenders won't just remove the PMI once your mortgage is down to a certain point. My understanding is that you will have to pay for (at minimum) an appraisal to get the PMI taken off. The bank has to document the LTV somehow, and they love to get you to pay for any type of paperwork.
If this is the case and you're planning on staying in your house for a while, you might consider refinancing at the same time. We have refinanced a couple of times since we bought our house in 2006 at a 6.875% (eek!) rate. The second time we were able to rid ourselves of PMI by finally being under the 80% LTV. Early this summer we were able to get a 15-year fixed at 3.0%, and I think rates are even lower now. Assuming that you can get this done somewhere with low closing costs (I think there's an MMM forum out there about recommended lenders for low refinancing) and the numbers work (which they may not since you have wisely chosen a modestly priced house), you could help your savings even further. The CNN website has a great refi calculator to help you decide if it's worth it, and even helps you do calculations for keeping your initial payback period.
-
I would want to get rid of PMI but agree with the previous poster that you'll want to check with your lender to see if they require an appraisal. They might not; in our case, we just sent in a check and they didn't do an appraisal. Good to know in advance, though.
-
This is a no brainer right? I should pay the mortgage down $6,152 because I'm essentially paying 9.765% on that money.
Yes. That is the correct way to be looking at it and it goes without saying that I doubt you can get a better return anywhere else.
-
Be aware that you will probably want to aim below an exact 80/20 LTV ratio, because you cannot say for sure where your appraisal will come out (assuming the lender requires one). You won't be able to plan on bringing exactly $6,152 to hit your magic number. Right now there's a very well-documented problem with appraisers under-valuing properties on both purchases and refinances. You don't want to pay around $500 for an appraisal only to find out they low-balled the value, and you'll need to bring even more money to settlement to reach the 80/20 LTV ratio. To play it safe, make sure you are closer to 75/25 on the estimated value of your house, or perhaps even 70/30 (or that you are able/willing to bring additional cash in to make up the difference if the appraisal falls short).
When I refinanced several months ago, the bank hired a part-time, retired appraiser who lives in a tiny, rural town, from a completely different state. Everyone in real estate knows it is highly local. Our house is in a large metropolitan area with many dynamically changing, different pockets of neighborhoods, in one of the few areas of the country where real estate is appreciating. It was evident when I met her she knew nothing about our local real estate market. And indeed, she blew the appraisal, undervaluing the house by $50-75k. My experience is not unique, it happens all the time.
-
Thanks for your replies! From what I have read, at 80% LTV you can request to have the PMI removed. At 78% LTV, the lender is *required* to remove PMI. I wonder if I can get around the appraisal if I pay down to 78% LTV (based on original purchase price?). I guess I will just have to call my lender to see.
-
Just check to make sure you do not have an FHA loan also. If it is FHA, I believe you are required to pay the PMI for 5 years no matter how much of the loan you have paid off.