Author Topic: Pay off PMI is hair on fire emergency versus investing in taxable accounts?  (Read 858 times)

Radioherd88

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Hello again friends - so a year or so later our situation has changed a bit and I wanted to revisit the whole "to pay off or not to pay off the mortgage vs invest"

Here's the current scenario monthly:


$1800 Mortgage Payments (30 years)
$150 PMI (approx 15 k will be paid in PMI if nothing extra put to Mortgage)
$1583 maxing out spouses 401k
$1583 maxing out my 403b
$1583 maxing out my 457b
$483 going to HSA's/FSA's

$433 going to ESPP stock plan
$1000 going to 2 x Roth IRAs
$700 undecided on invest in taxable VTSMX or pay off mortgage principle

So my question is - for these bottom 3 options where there is no immediate tax benefit, would i be better directing all of those payments at the Mortgage amount to remove PMI as a priority over these other accounts and then reassess once PMI is gone?

I've read the other posts on here about removing PMI but i'm struggling to work out how best to calculate what % intesret that PMI is costing me, and then compare it to the lost opportunity cost of investing whatever i put into VTSMX if i was to pay down some mortgage principal early. Is removing PMI a hair on fire emergency? 

lhamo

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What is the current balance on your mortgage vs. equity in the house?  It would be easier to give an informed answer to your question with this additional info (because then we could figure out roughly how long you would have to make the extra mortgage payments to get out of the PMI zone).

Keep in mind you will probably also have to pay for a reappraisal of the house to document to the bank that you are above the PMI threshold.   That is an additional cost to consider as you way different options.

MDM

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I've read the other posts on here about removing PMI but i'm struggling to work out how best to calculate what % intesret that PMI is costing me, and then compare it to the lost opportunity cost of investing whatever i put into VTSMX if i was to pay down some mortgage principal early. Is removing PMI a hair on fire emergency?
What parts of PMI Payoff ROI? or Getting rid of PMI? What % "return" would I get for paying down my mortgage? need elaboration?

Radioherd88

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What is the current balance on your mortgage vs. equity in the house?  It would be easier to give an informed answer to your question with this additional info (because then we could figure out roughly how long you would have to make the extra mortgage payments to get out of the PMI zone).

Keep in mind you will probably also have to pay for a reappraisal of the house to document to the bank that you are above the PMI threshold.   That is an additional cost to consider as you way different options.

See the attached for the beginning of the Amortization schedule - it's mostly interest and PMI for the foreseeable future....

Yes i have a friend that would do the reappraisal so i'd be ok on that front

Radioherd88

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I've read the other posts on here about removing PMI but i'm struggling to work out how best to calculate what % intesret that PMI is costing me, and then compare it to the lost opportunity cost of investing whatever i put into VTSMX if i was to pay down some mortgage principal early. Is removing PMI a hair on fire emergency?
What parts of PMI Payoff ROI? or Getting rid of PMI? What % "return" would I get for paying down my mortgage? need elaboration?


Well i tried doing it both your way MDM:


Another way to look at it:

Without PMI, the monthly payment on a 30 year $402, 383 loan at 3.75% is $2027.51.  In the first month, the interest charge is $402, 383 * 3.75% /12 = $1259.34.  Treating the PMI as interest, the effective rate for the first month is ($1259.34 + $161.20) / $402, 383 * 12 = 4.23%,

By the 15th payment, as the remaining balance and thus the non-PMI interest amounts change, a similar calculation gives ($1232 + $161.20) / $402, 383 * 12 = 4.15%.  The percentage increases slowly over the years.... Yeah this one decreased for me so doing something wrong…..

The annualized ROI for ridding oneself of PMI is $161.20 * 12 / (current balance (393, 683) - $339200).  = 3.55%?

3.55% = 3.75% = 7.3% to get rid of the PMI….


And Nawhite's way:


It depends on how much money you have to pay to hit 80% LTV.

You need to pay off an additional $54, 483 before you lose the PMI. In this case, think about it like a loan for $11,990 with an interest rate of 3.5% plus a fixed rate of $59.95/month. So yearly, the cost to carry this loan of $11,990 is:

161.20*12= $1934.4

1934.4 / 54, 483 = 3.55%

3.55% + 3.75% = 7.3% (so every dollar you put towards this loan gives you a risk free return of at least 7.3%)

And yes eventually i got to the same 7.3%return to get rid of it, but the increasing % you closer to get isn't working for some reason the way i did it with yours. See above with my numbers in both scenarios....

So - assuming that i calculated correctly that at it's best stage (present day), PMI is costing me 7.3%, and we estimate 7% as the average return for a VTSMX investment, and the return on the PMI payoff is guaranteed - i should focus on getting rid of PMI over a normal taxable investment?

Then once PMI is gone, normal Taxable investment is likely the better bet, as from that point, i'll only be getting back the 3.75% interest on the loan post PMI?

MDM

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So - assuming that i calculated correctly that at it's best stage (present day), PMI is costing me 7.3%, and we estimate 7% as the average return for a VTSMX investment, and the return on the PMI payoff is guaranteed - i should focus on getting rid of PMI over a normal taxable investment?

Then once PMI is gone, normal Taxable investment is likely the better bet, as from that point, i'll only be getting back the 3.75% interest on the loan post PMI?
That seems reasonable.