Should I pay off $3975.20 to eliminate PMI?

[Oldsmobile]

My FHA mortgage is now 5 years old, so I inquired as to lifting PMI.  I've made extra principal payments regularly.  My contractual remaining term is 25y 0m, but my actual remaining is 21y 9m.

Current balance is $98,484.87.  Bank says that I need to get to 78% LTV, which is $94,509.67.  They want $3975.20 in order to eliminate the PMI, which runs $48.33 per month. 

I'd like to free up that nearly $50 per month, but it is not absolutely critical at this time.  According to the bank's calculator, without any extra payments, I'd reach that $94,509.67 level sometime in mid-2017.

What's the best financial practice here?  Pay that money and eliminate the PMI right now, or stick it out for another ~2 years and preserve my $4k for other uses?

Thanks, experts.

[Gone Fishing]

Yes.  The PMI is equivalent to paying 15% extra on that 4k over your mortgage rate.

[Oldsmobile]

My mortgage rate is 4.5%. 

I guess the PMI, since it doesn't give me ANY benefit at all, needs to go ASAP so that I can start preserving that $48.33 for my own use.  Right?

I was hoping that I'd be farther along on my payments by now, and/or for the home value to be higher.  I chose to get a home equity loan earlier this year for a major HVAC need rather than wiping out all my savings and investments, and that included an appraisal by a different lender.  Some of what I was reading suggests that PMI isn't going to be eliminated if there's a second mortgage, but I wasn't able to determine for sure.

[Gone Fishing]

My mortgage rate is 4.5%. 

I guess the PMI, since it doesn't give me ANY benefit at all, needs to go ASAP so that I can start preserving that $48.33 for my own use.  Right?

I was hoping that I'd be farther along on my payments by now, and/or for the home value to be higher.  I chose to get a home equity loan earlier this year for a major HVAC need rather than wiping out all my savings and investments, and that included an appraisal by a different lender.  Some of what I was reading suggests that PMI isn't going to be eliminated if there's a second mortgage, but I wasn't able to determine for sure.

Call your lender, but they shouldn't care about the second.  Although, my last rental refi required I close the equity line even through they would subordinate, so who knows.  Also make sure they don't require an appraisal (mine did when I dropped PMI but that was 10 years ago and the rules have changed since then)or other garbage fees.  But even if they do it is almost certainly worth it,  as you are effectively paying 19.5% on that 4k!

[thd7t]

As So Close has mentioned, your PMI is the equivalent of a 15% loan on $3875, if you pay it off in 1 year.  However, you're also paying 4.5% on this.  In addition, if you let it sit for 18 months (until mid 2017), the average rate for just the PMI goes to 29% before adding in your regular interest!  You are looking at over a 30% return here.

Note: my math is based on treating your remaining $3975 as a loan amortizing in 18 months.  The longer you pay PMI, the higher the effective interest rate is, as the rate doesn't diminish as your loan does.  PMI is pretty tricky this way.

[Gone Fishing]

As So Close has mentioned, your PMI is the equivalent of a 15% loan on $3875, if you pay it off in 1 year.  However, you're also paying 4.5% on this.  In addition, if you let it sit for 18 months (until mid 2017), the average rate for just the PMI goes to 29% before adding in your regular interest!  You are looking at over a 30% return here.

Note: my math is based on treating your remaining $3975 as a loan amortizing in 18 months.  The longer you pay PMI, the higher the effective interest rate is, as the rate doesn't diminish as your loan does.  PMI is pretty tricky this way.

Good point! The closer to the end you get, the worse it gets! The last payment before PMI is dropped on a regular payment scheduled is probably something like a 1000%+ annualized rate!

[Oldsmobile]

Wow.  Thanks for laying it out for me, folks.  I appreciate the input and perspective.  Now, I need to get some of this money together and send it off so that I can start saving that PMI for myself.  Or apply it to the HEL.

[etotheix]

Wow.  Thanks for laying it out for me, folks.  I appreciate the input and perspective.  Now, I need to get some of this money together and send it off so that I can start saving that PMI for myself.  Or apply it to the HEL.

I think it will be worth your while to read this post by heart of tin to explain what the true cost of PMI is.  Your actual return including the time value of money ($1 tomorrow is worth less than a $1 today) will be significantly lower than the crazy returns quoted above.

It generally is worth it to eliminate PMI -- but in truth it usually offers a decent guaranteed return instead of an insane guaranteed return as advertised above.