The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: JDsNova on January 21, 2017, 05:40:26 PM
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I saw a previous post that talked about PMI.
Here's my situation.
Perhaps my question is a simple one with a simple answer.
I just recently tried talking my bank into terminating PMI, and their response was 'No'.
To be free of PMI, I need to have paid down the loan to a LTV ratio of 78%. So by their calculations, if I continue on schedule payments, I'll be at that point in almost exactly 3 years. The PMI is $1429 a year. To get to 78% of the LTV ratio today, I would need to pay down the loan by almost exactly $10k.
What's the wiser move with my money? Pay the 10k and get rid of PMI or invest the 10k elsewhere?
Thanks!
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The PMI is $1429 a year. To get to 78% of the LTV ratio today, I would need to pay down the loan by almost exactly $10k.
That appears to be a 14.29% return on your money. Looks pretty good....
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I got rid of my PMI last year. In my situation the best thing to do was refinance. I purchased the home for $203K in 2013 with 5% down and it appraised for $250.
If you think this is your case based on recent sales in your neihboorhood, then this might be a quick way to get rid of that PMI.
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Has your home value increased since you bought your house? I paid $110 for a broker's price opinion, which narrowed the equity gap considerably so then I just paid the ~$1500 difference in principle to drop PMI.
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Yes. I bought my home in 2008. It was a foreclosure. The bank doesn't seem to think equity is a criteria for eliminating PMI. I did refinance the home in 2012 to get a lower interest rate.
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Yes. I bought my home in 2008. It was a foreclosure. The bank doesn't seem to think equity is a criteria for eliminating PMI. I did refinance the home in 2012 to get a lower interest rate.
Can you get something in writing from them that indicates the criteria for dropping PMI? PMI is based on equity in the first place, so they really should be able to do it.
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They sent me something that's says equity can't be a decider because HUD only uses the current values of the LTV and won't consider a new appraisal to determine LTV.
The other stipulation is that I have to pay MIP though Oct of 2017.
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If you have an FHA loan, you don't have private mortgage insurance. You have mortgage insurance with the FHA and the rules are different. Given the hefty MI premium, I would have the principal paid down to the point the MI can be removed by October.
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ARNOLD SAYS
"Terminate PMI"
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Thanks for the responses. It is indeed a FHA loan.
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Mortgage insurance is a cost that needs to be eliminated ASAP, at least in my mind. You say it will take three years of normal payments to rid yourself of it - 1429 X 3 = $4,287. Plus that is $10k put towards principle that you are no longer paying off interest on, so say you have a 30 year loan @ 4% - that means $400 more per year going towards the principle for the remainder of your mortgage.
The first three years you will see the best return - ~18.29% each year (1429 from insurance and 400 from less interest). Followed by a compounding 4% return until you close out your loan, which will end earlier than normal - another benefit.
$10,000 compounded monthly at 4% for 21 years would be $23,131.
So your $10,000 will give you a guaranteed return of $17,418 over the course of the 21 years remaining on your mortgage. ($23,131 + 4287 - your initial $10k investment)
Basically, with everything included it would be a guaranteed return of just under 5% on average over 21 years.
I would do it, but I am very against mortgage insurance and I don't like paying interest either.
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Mortgage insurance is a cost that needs to be eliminated ASAP, at least in my mind. You say it will take three years of normal payments to rid yourself of it - 1429 X 3 = $4,287. Plus that is $10k put towards principle that you are no longer paying off interest on, so say you have a 30 year loan @ 4% - that means $400 more per year going towards the principle for the remainder of your mortgage.
The first three years you will see the best return - ~18.29% each year (1429 from insurance and 400 from less interest). Followed by a compounding 4% return until you close out your loan, which will end earlier than normal - another benefit.
$10,000 compounded monthly at 4% for 21 years would be $23,131.
So your $10,000 will give you a guaranteed return of $17,418 over the course of the 21 years remaining on your mortgage. ($23,131 + 4287 - your initial $10k investment)
Basically, with everything included it would be a guaranteed return of just under 5% on average over 21 years.
I would do it, but I am very against mortgage insurance and I don't like paying interest either.
Great post! Thanks!
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Thanks for the responses. It is indeed a FHA loan.
I could be wrong, but I thought you couldn't get rid of mortgage insurance with an FHA loan anymore. (Maybe your loan is old enough those terms don't apply?) The only way to get rid of it is to refinance to a new loan that doesn't require MIP.
Mortgage insurance premiums (MIP) are not the same as private mortgage insurance (PMI).
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I recently ran some numbers on this for my own house, and I concluded that I come out a little bit ahead paying the MIP and investing the lump sum it would take to pay off MIP instead of paying it off. The thing is that your payments don't go down when you make the lump sum payment, so you lose use of the lump sum amount for the life of the loan, but you're only saving MIP for a few years.
Of course, for me, I plan to keep the house until payoff and not refinance. Changing those assumptions, plus any tax implications, will change the results. But you should be able to project it pretty easily in a spreadsheet.