Author Topic: PMI or Investing?  (Read 14902 times)

mrgrump

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PMI or Investing?
« on: January 19, 2014, 04:42:37 PM »
Hello- First time forum reader but I have read all of the blog posts and started my own blog as a result of MMM. However, I am pretty new to investing / having my hair on fire to get out debt. I was writing to see what you guys think we could do better with our savings/investments.

Liabilities
$17,000 car loan ($450/month payment) on 2012 Honda CR-V @ 0%
$312,700 mortgage ($2,400***/month payment) at @ 4.25% 
***This payment includes $155 pmi, insurance, taxes, p&i) we need to pay off $46,500 to get rid of PMI.

Assets
$47,000 Wifes 401k
$36,000 Wifes Profit Sharing
$28,000 My 401k
$15,000 To invest/keep on hand.
$6,000 rainy day fund (6 weeks expenses)
$14,500 2011 Honda Accord (Paid Off)
$1,500 College fund for our 1 year old son
$1,500 brokerage account at Scottrade.

Current Savings:
$850/month into my wifes 401k
*I currently stay at home with the boy so no 401k contributions for me.
$650/month EXTRA on the mortgage
$100/month into my sons college fund.

We currently save additional $700 to $900 a month extra we intend to put use on the mortgage or investing.

We currently have about $15,000 to invest.

Do we take this money and pay down our mortgage getting us closer to eliminating PMI? (My Vote)
Open a Vanguard Account and invest the money in index funds? (rolling over the Scottrade account eventually)
Pay off the CRV freeing up $450/month to put towards house (the car is at 0% interest, I don't think this is are best move)
Do we get really crazy and cash out my 401k money to pay down the house and avoid PMI?
Do we cash in the small Scottrade account to put towards the debt?

Questions about savings plan
Do we re-allocate any of the savings to other sections? For example increase 401k contributions and decrease college fund contributions?
Do we pay down pmi or max out my wifes 401k?

Let me know what you guys think. Thanks!

Mr. Grump

shuffler

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Re: PMI or Investing?
« Reply #1 on: January 19, 2014, 06:55:40 PM »
Hi Mr. Grump -

This is my first time giving an opinion on someone else's situation, so please take it with a grain of salt.

I would suggest you consider shoring up your emergency fund.  Being a one-income household (as we are too) means that you're one negative event from needing to draw on those emergency funds.  You say your expenses are $1k/wk, so a 6mo fund would be ~$26k.  If you have $6k in "rainy day" and another $15k "on hand", then you've got a little bit more saving to do there.  (6mo is just a rule of thumb, of course.)

After that, yes, I would work on the PMI.  You pay $155/mo and need to pay down $46.5k more to eliminate it.  Paying it off would save you $1860/yr, which is a 4% return on the $46.5k.  Plus, of course, the 4.25% of the mortgage rate, making 8.25% return overall.  That's a guaranteed 8.25% return, and you're unlikely to find anything as nice as that in the market.

(Additional discussion of PMI if you search the boards.  Here, for example:  http://www.mrmoneymustache.com/forum/ask-a-mustachian/pmi-payoff-roi/)

You may also get some suggestions for reducing your expenses, which would be a good goal too.  Though I won't comment on that myself.  You may try the "Ask a Mustachian" board rather than "Investing" if you want more of that sort of advice.

Cheers!

clarkm04

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Re: PMI or Investing?
« Reply #2 on: January 19, 2014, 07:15:11 PM »
- I would pay the PMI off first.

- You might need more in your emergency fund depending on how stable your wife's job is.

- Regarding the car, how long is it at 0%? What will the APR be afterwards?

- Does your wife's employer match her 401K?  If so, you might consider just hitting the match and then lowering her contribution until the PMI is paid off.

- I would look into finding ways to cut other spending to tackle the PMI.

- Don't cash the 401K.  You'd have to pay taxes on it and a 10% penalty. 

- Any credit card debt?  You didn't list any.  If not, cool.

Good luck on knocking off your PMI.  My SO and I should have ours paid off 7 years early.

mrgrump

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Re: PMI or Investing?
« Reply #3 on: January 20, 2014, 01:45:37 AM »
Thanks Shuffler...My wifes job is stable and we have other assets (401k and such, the accord) to sell in absolute emergency, We used to carry 6 months rainy fund until December when we paid off the accord following the advice of this website.

To me it seemed like this website advocates putting your money to work as I think MMM uses some home equity line of credit an as his rainy day fund. I don't feel comfortable doing that just yet. Anyways, isn't the point to have every dollar working for you? We have been slashing expenses for the last two months and will continue to do. This month we attack car and home insurance.

Thanks clarkm. At the moment my wife's job is very stable but it is a little nerve wracking having only 1 income just because we haven't gotten used to having 2. I will not be able to return to work until July which will diversify are income but add the expense of day care.

1. The car is at 0% for the life of the loan. (Approximately 36 monthly payments remain)
2. My wife's employer does not match 401k contributions as they provide sharing instead. We have been considering lowering her contribution but with the compounded interest (401k) v. simple interest debate (mortgage) debate I haven't been able to decide.
3. I am on the same wave length about not cashing in the 401k.
4. No credit card debt or any other kind other than the mortgage and car loan.

Khan

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Re: PMI or Investing?
« Reply #4 on: January 20, 2014, 01:53:39 AM »
From Shuffler
Quote
After that, yes, I would work on the PMI.  You pay $155/mo and need to pay down $46.5k more to eliminate it.  Paying it off would save you $1860/yr, which is a 4% return on the $46.5k.  Plus, of course, the 4.25% of the mortgage rate, making 8.25% return overall.  That's a guaranteed 8.25% return, and you're unlikely to find anything as nice as that in the market.

Guarenteed returns are amazing. I second this. Do whatever you need to do in other areas, but getting off PMI is the best move you can do.

clarkm04

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Re: PMI or Investing?
« Reply #5 on: January 20, 2014, 08:02:15 AM »
I think any decision you make will work out.  The key is investing or paying down existing debts while always spending less than you make.

In your shoes, I'd probably do this (but again, there's numerous ways to get there, so pick a method that makes the most sense for your family).

I'm treating my PMI as a hair on fire emergency and I think you should too.  Basically if I came to you and said I'm making interest payments of 155 a month, you'd tell me to pay it off ASAP.  I would throw as much money to this as possible.

I would pay the bare minimal on the car since it's at 0%.

I'd half your wife's 401K contributions until PMI is paid off so from 10K a year to 5K.  After the PMI is paid off, I'd attempt to max her 401K out yearly.

I'd continue to fund the college plan since the horizon is shorter than retirement.

I'd probably keep 10K in an high interest savings account and then put the remainder into ROTH IRA.  You can still contribute 5500 for tax year 2013.  The advantage of ROTH is you can take your contributions without penalty anytime.

Here's a good article from Michael BlueJay on investing versus paying down a mortgage.  His calculations doesn't include paying PMI, so the numbers would be even more skewed towards mortgage pay down.

http://michaelbluejay.com/house/15vs30.html

Good luck!

Texas82

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Re: PMI or Investing?
« Reply #6 on: January 21, 2014, 11:48:15 AM »
if you can and assuming your LTV is 95% or less, find a reputable mortgage broker to help you find a LPMI (Lender Paid MI) loan program...basically the lender will pay your MI to get your business.  Of course, unfortunately, you most likely will have to refinance to do this.

Pros:
*you pay $0.00 in MI throughout the life of the loan
*you save $1860.00/year x how ever many years you reside in the home
*you don't have to put down a huge chunk, like $46k, to get rid of your borrower paid MI and invest that elsewhere

Cons:
*rates are currently higher than your 4.125% rate
*broker/lender/title fees
*could take a few years to recoup the cost of refinancing (if the fees for refinancing is 6,000, it would take you 3.23 years to recoup those costs - assuming your mtg pmt doesnt increase)


good luck!

BayIslandSaver

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Re: PMI or Investing?
« Reply #7 on: January 21, 2014, 12:19:16 PM »
I'm for paying down the PMI as quickly as possible (w/o cashing the 401K).

Keep in mind that there are two ways to remove PMI:  hit 78% LTV based on the original terms of your loan or hit 80% LTV on the current value of your home.

With housing values going up you may be able to meet the 80% mark sooner than you think.
You should look at comps, and if you're confident of an 80% LTV, you could send a request to your mortgage servicer.  This route will likely require an appraisal which will have some costs associated with it.


mrgrump

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Re: PMI or Investing?
« Reply #8 on: January 22, 2014, 01:55:33 AM »
Thanks Texas82, we actually thought about going the rate you suggest however the route you suggest was more costly. As in the higher interest rate over 30 years cost more than the PMI for 9 even though we have always been of the mindset to try and pay it off early. Good advice though.

BayIsland I have a question....Below is the vernacular right the mortgage website. To me it seems like we might be able to request it without the appraisal, what do you think? We have only been in the house about 6 months so I don't think the values have increased that much, I do keep pretty good eye on what houses list for in my neighbor and one a little bigger just went on the market for about $100k more than what we got our house at. I sure hope they sell it.

IF the property values keep rising, which I think they will, I think I am going to take your advice and request one next summer when there are more comps and we have some more equity.

We are preparing for tax time now and with the addition of baby last year I am hoping to get some of a tax break refund and ship it off to the mortgage lender to help pay down the debt.

Thanks for the advice mustachians!

If you have a good payment history, you may request cancellation of your MI on or after the date the principal balance of your loan:   
•Is first scheduled to reach 80% of the original value of the property (80% LTV).
•Actually reaches 80% of the original value of the property.
 
Other considerations for approval of a cancellation request may include: 
•Evidence the value of the property securing the mortgage has not declined below the original value.
•Certification that there are no other liens against the property.
 
If you do not request cancellation, and you are current on your loan payments, then MI will terminate automatically:   
•On the date the principal balance of your loan is first scheduled to reach 78% of the original property value.
•On the first of the month following the mid-point of the loan term (i.e. after 15 years for a 30 year mortgage).
 

gotaholen1

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Re: PMI or Investing?
« Reply #9 on: January 22, 2014, 11:36:15 AM »
Are you contributing to a Roth IRA at all?  Not sure if the income is too high. 

I would try to get rid of the PMI, then probably stop paying extra towards the mortgage.  If the car is at 0% interest forever, I would use those extra funds that you were putting towards the house into a roth ira if you qualify. 

You also have quite a bit invested in 2 newer cars.  If you could sell the Accord for around 15k and then use the additional 15k cash, you are only about a year away from being done with PMI.  Not sure if you can make 1 car work for a year. 

Have you done any improvements on the house?  If so, itemize them out and have an appraisal done (with one of the bank's approved appraisal companies).  Walk the appraiser around the property and show them all of the improvements you have made. 

mrgrump

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Re: PMI or Investing?
« Reply #10 on: January 22, 2014, 03:45:56 PM »
Gotaholen1, Currently I am not contributing anything to an IRA, Roth or otherwise.

We are currently kicking around the idea of downgrading one of the cars but it probably wouldn't be done until summer after we see what sort of job I can land. Ideally, we would like that job to be within biking distance but that does not leave many options. After the reading all of the responses I think our plan is to...

1. For me to land a job in the $40-$60k pay range in the next year.
2. Pay off PMI. The goal is to have it done by Jan 1. 2016
3. Reduce extra mortgage payments to the $200-$300/month range
4. Max out both 401ks (or 403b or what not)
5. Open an IRA each, max them out.
6. Fund college fund at $2k a year per kid(tax advantaged fund of course)
7. Stuff remaining money into vanguard index funds.

If our house appreciates significantly, which it could, sell it and downsize, stuff the extra money into the most sensible investment. (probably a house to live in)

Heart of Tin

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Re: PMI or Investing?
« Reply #11 on: January 23, 2014, 04:50:08 PM »
You pay $155/mo and need to pay down $46.5k more to eliminate it.  Paying it off would save you $1860/yr, which is a 4% return on the $46.5k.  Plus, of course, the 4.25% of the mortgage rate, making 8.25% return overall.  That's a guaranteed 8.25% return, and you're unlikely to find anything as nice as that in the market.

PMI posts are my pet peeve on this site. Fuzzy math like this is rampant in PMI posts, and it paints a false picture not only of this specific scenario but of money in general as having no time value. I still think you should pay down the PMI, but the above quoted 8.25% might be a bit too small (if you sell the house relatively soon) or much too big (if you keep the house for more than five years). For the sake of clarity, when I use the word "return" in this post I'm talking about the marginal nominal annual internal rate of return compounded monthly on just the extra payments.

The largest return will be achieved if you don't roll the PMI payments into the mortgage, but instead realize them as "income" (that is, as a reduced expense equivalent to income) as they occur. In this post I'll assume that eliminating PMI generates income in this way (that is, you don't snowball the PMI payments into the mortgage after PMI is gone). I'll further assume that the $800 extra payments will only last as long as the PMI in order to isolate the effect of PMI pay-down (note that the examples below are valid whether or not extra payments continue after PMI is paid off, but such payments will earn a return equivalent to the APR on the loan and are therefore uninteresting and unrelated to this thread).

The biggest factor in determining your return is how long you will need to wait between eliminating PMI and realizing the resultant difference in the balance of the mortgage under the accelerated payment schedule versus the standard payment schedule as increased "income" (as defined before).

For example, it sounds like you will now be making 24 PMI payments under the accelerated payment schedule. Let's assume that you would have made 48 PMI payments under the standard schedule. Therefore, 24 monthly payments of $800 generated 24 monthly "income" payments of $150. Additionally, the $800 principle payments reduced your mortgage balance by 800*((1+.0425/12)^24-1)/(.0425/12)*(1+1.0425/12)^24 = $21,774.00 over four years. However, this reduction in the mortgage balance isn't really worth anything unless your planning on using the debt reduction to take on more debt or you will be selling the house for a profit or you will be paying off the mortgage in full at that time.

For the sake of argument, let's assume you did sell four years from now. Using Excel's IRR function, I can find that the actual return on the extra payments would be 9.83%. That's a great return, but it's only correct if you use the lower mortgage balance four years from now.

On the other hand, let's assume that you neither take out any further home loans nor do you sell the house before the mortgage is paid off. If it take you 20 more years (240 months, exactly) to pay off the mortgage under the accelerated payment schedule, then under the standard payment schedule you will still owe 800*((1+0.0425/12)^24-1)/(0.0425/12)*(1+0.0425/12)^216 =$42,927.62 at month 240. At that point, you will realize monthly "income" equal to your mortgage payment until the month where the standard schedule would have paid off the mortgage. Focusing only on the principle and interest portion of the mortgage, let's assume that your payments are $1,900, and the standard schedule last 24 additional months. In this scenario, 24 monthly payments of $800 were immediately followed by 24 monthly "income" payments of $155 followed by 192 months without payments followed by 24 months of $1,900 "income" payments. Again using Excel's IRR function, the actual return on the extra payments would be 5.3%. That's still high enough to justify paying down the PMI over investing, but not nearly as high as quoted in the post above nor as high as in the example I previously worked.

Splitting the difference, let's assume that you sell the house for a profit in ten years. At that point you will have 800*((1+0.0425/12)^24-1)/(0.0425/12)*(1+0.0425/12)^96 = $28,085.86 in increased equity. In this scenario, 24 monthly payments of $800 were immediately followed by 24 monthly "income" payments of $155 followed by 72 months without payments followed by one income payment of $28,085.86. Again using Excel's IRR function, the actual return on the extra payments would be 6.3%. While that's certainly a worthy (almost) guaranteed return, it's far short of 8.25%.

Here's a graph of the return on the $800 payments by the number of years until the extra "income" is realized as a lump sum as in selling the house:


Tldr; the return on extra principle payments is inversely related to the length of time that you will carry the mortgage. We cannot calculated the return on mrgrump's extra payments unless we know how long he plans to carry the mortgage.

Mazzinator

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Re: PMI or Investing?
« Reply #12 on: January 24, 2014, 01:02:30 AM »
Not trying to be a bitch here...but really? The advice from this forum was to pay off (and not sell/downgrade) your cars?? Sell them both and buy one very nice older used civic. Once you're close to getting a job, then bike or buy another one. You could buy 3 cars for $14.5k!!!

mrgrump

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Re: PMI or Investing?
« Reply #13 on: January 24, 2014, 01:49:04 AM »
Mazzinator, Thanks for the advice.

Heart of tin, You put a lot of work into this and I appreciate that. What if I present a little different math and see if you agree?

PMI Payment = $155/month
With no extra payments we would pay it for 103 more months
Total PMI Premium = 155 x 103 = $15,965
Amount it takes to cancel PMI = $46,500

If we stick to our goal of paying it off in 24 Months we will pay $3,720 in PMI Premiums. Saving 79 months or $12,245 of the premium.

By Taking the savings of $12,245/$46,500 the money it takes it to get rid of PMI I get 26.3% return. This also doesn't include the extra savings in terms of interest over the life of the mortgage. The faster we pay it off the higher "return" the slower the lower.

If mortgage rates remain low (3.5%) area we would more than likely refinance to a 15 year mortgage. It only would only add about $300 to the current mortgage and since we will have been overpaying by much more than for 2 years we would still ease into lower payments and chop almost 12 years from the mortgage and a boatload of interest.

Do you agree with this math?
« Last Edit: January 24, 2014, 02:17:02 AM by mrgrump »

Mister Fancypants

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Re: PMI or Investing?
« Reply #14 on: January 24, 2014, 12:11:36 PM »
Contribute to the 401(k) before paying off your mortgage to eliminate the PMI.

Every dollar you contribute is not taxed at your marginal (top) tax rate.

So your wife currently contributes $850/month which is $10,200 annually, you didn't indicate salary so the actual return will vary, the more you make the better it will be. If you make less than $72k the ROI is 15%, if it is between $72k and $146K it is 25%, based on your overall numbers I'm guessing you are in one of those two tax brackets.

Depending on the state you live in the ROI might be a lot higher, as state income tax in California, NY, NJ etc can increase the return by 6% to 9%.

Also IRA contributions work the same way, so if you are income eligible you can contribute to both an Traditional IRA and possibly a non-working Spousal IRA, both up to $5000 (you can make 2013 contributions up until you file your 2013 tax returns).

Strictly from a returns perspective the tax advantage beats the return on PMI hands down, and if you are looking at addressing your overall finances the retirement accounts should come first, I understand the knee-jerk reaction to want to get out from under PMI and treating it like a hair on fire emergency however thinking long term and taking advantage of the annual tax advantaged contributions are actually the best immediate and long term return available.

Also if the college fund contribution if it is not into a state specific 529 account with a tax advantage that is better than Heart of Tin's lowest return of 5.3% I would stop making that contribution and redirect that towards the mortgage until the PMI threshold has been met. I use his lowest return as that is the your current scenario and until you do something like sell the house or refinance that is the only one that matters, so the reality is right now you are paying off your mortgage until it is gone, when you do something else you can calculate for that, everything else is not practical math. Just calculate for the the scenario you are in, not all the what if's they complicate the situation and keep you from making the best decisions for right now, as things change in the future re-evaluate.

Right now, keep up the 401(k) contributions increase them if possible up to the $17.5k annual max, I would make eligible IRA contributions (Use the $1500 from the ScottTrade account towards an IRA or mortgage reduction), then pay down the mortgage to get rid of the PMI (possibly drop the college contribution depending on the tax advantage). Don't pay off the 0% car loan any sooner than it is due, keep your $21k cash on hand until you figure out what type job/income you are going to land, you said that is only 6 months away, you can re-evaluate then, perhaps some of the cash can be put towards mortgage then, or you can sell the Accord etc...


Good luck keep us posted
-Mister Fancypants
« Last Edit: January 24, 2014, 02:03:24 PM by Mister Fancypants »

bryaday

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Re: PMI or Investing?
« Reply #15 on: January 24, 2014, 12:43:11 PM »
I would not cash out the IRAs/401(k)s.

I would sell your current investments and paydown as much of the mortgage as fast as you can to eliminate PMI.

How long is the 0% interest on the Honda?  Depending on that might change my answer but I would not cash out retirement accounts because you will owe 10% penalty plus taxes (if traditional).

Heart of Tin

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Re: PMI or Investing?
« Reply #16 on: January 24, 2014, 05:04:37 PM »
By Taking the savings of $12,245/$46,500 the money it takes it to get rid of PMI I get 26.3% return. This also doesn't include the extra savings in terms of interest over the life of the mortgage. The faster we pay it off the higher "return" the slower the lower.

While I do agree with that math, I don't agree that you should use a 26% return to decide whether to invest or pay down principle.
 
This calculation yields only one part of the return on investment (ROI). You would need to include the reduction in future interest payments to get the entire ROI. However, I used the internal rate of return (IRR) in my calculations, not the ROI. There are key differences between the two.
 
The reason that I used the IRR instead of the ROI is that the IRR takes the amount of time that you will need to wait to profit into account. For that reason, the IRR can be compared to historic annualized stock market rates to decide where you should put your money. For example, if you could pay me one dollar today and get two dollars back in two years your ROI would be 100% and your IRR would be about 41%. Since 41% beats most historic annualized stock market returns over two years, you should probably give me the dollar instead of investing it in the stock market. On the other hand, if you could pay me one dollar today and get two dollars back in thirty years, your ROI would still be 100% but your IRR would fall to only 2.337%. Over a 30 year time frame, the stock market will probably beat an annualized 2.337% growth rate, so you should probably invest the dollar instead. My point is that timing matters, and ROI doesn’t tell the full story of which investment is better.
 
In your situation, you will be paying over $19,000 extra to principle over the next two years. You will then benefit from the elimination of PMI payments over several ensuing years, but the amount you get back will be dwarfed by the initial investment of $19,000. Essentially, you won't get that "principle" back until the end of your mortgage. Meanwhile it’s earning "interest" at the same rate as your mortgage instead of earning interest at the rate of your other investments. You can think of it like a stock that will pay dividends of $155 per month for a few years and earn interest at the rate of your mortgage, but you can’t begin withdrawing principle and interest until your mortgage is paid off or you sell the house or you use the increased equity for another loan.
 
In order to isolate the effect of the extra payments, you should directly compare the mortgage payment schedule with the $800 extra payments to the mortgage payment schedule without the $800 extra payments. So ask yourself, what would the mortgage payment schedule look like if you invested the $800? What would the mortgage payment schedule look like if you instead put the $800 towards your mortgage? Make the two schedules as realistic as possible. I tend to ignore the tax and insurance part of your mortgage payments since you will, presumably, be paying taxes and insurance premiums every year with or without a mortgage. Subtract the extra mortgage payment schedule from the investing schedule, and find the monthly effective internal rate of return. You will either need a financial calculator or a spreadsheet with financial functions to do this unless you enjoy lengthy guess-and-check problem solving. Multiply the IRR by twelve to make it a nominal annual rate compounded monthly, or add one to the IRR and raise the sum to the twelfth power then subtract one to find the annual effective rate. The annual effective rate can be used to compare with stock returns as those are generally quoted as annual effective rates. However nominal annual rates compounded monthly are equivalent to APRs or APYs that are compounded monthly. As always remember that historic returns do not always correlate with future returns and that the stock market is very volatile. Directly comparing assets with different risks is problematic.
 
Here's a Google Docs spreadsheet illustrating the IRR calculation with an example loosely based on your  situation: https://docs.google.com/spreadsheet/ccc?key=0AublLf1JXQgkdEFrY0dabE1oeFloVlJraHFRYUVsZmc&usp=sharing.
 
Refinancing will complicate the picture, but the above algorithm is still valid. Compare for the entire length of mortgage regardless of refinancing. That is, include the refinanced portion of the mortgage in your calculations. Also include the estimated cost of refinancing as a cash flow out at the time of refinancing in the extra payment schedule and a cash flow in at the time of refinancing in the standard payment schedule. Consider whether you be able to refinance sooner due to the extra principle payments. Do the calculation both with and without refinancing since there is no guarantee of a lower rate in the future.
 
If you plan to sell the house before the end of the mortgage, then the difference in the mortgage balance should be used as a one time cash flow in in the IRR calculation. As illustrated above, this will probably increase the IRR.

BayIslandSaver

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Re: PMI or Investing?
« Reply #17 on: January 24, 2014, 06:11:37 PM »


BayIsland I have a question....Below is the vernacular right the mortgage website. To me it seems like we might be able to request it without the appraisal, what do you think?

[...]

If you have a good payment history, you may request cancellation of your MI on or after the date the principal balance of your loan:   
•Is first scheduled to reach 80% of the original value of the property (80% LTV).
•Actually reaches 80% of the original value of the property.
 
Other considerations for approval of a cancellation request may include: 
•Evidence the value of the property securing the mortgage has not declined below the original value.
•Certification that there are no other liens against the property.
 
If you do not request cancellation, and you are current on your loan payments, then MI will terminate automatically:   
•On the date the principal balance of your loan is first scheduled to reach 78% of the original property value.
•On the first of the month following the mid-point of the loan term (i.e. after 15 years for a 30 year mortgage).

I agree with your interpretation.  80% LTV on the original value should not require an appraisal.  If you do end up getting an appraisal, make sure to de-clutter/semi-stage your place.  I've experienced a handful of appraisals and found it can make a difference. 

eman resu

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Re: PMI or Investing?
« Reply #18 on: January 25, 2014, 11:10:21 AM »
Other considerations for approval of a cancellation request may include: 
•Evidence the value of the property securing the mortgage has not declined below the original value.


The above means that at 80% (date originally scheduled or when actually achieved) your lender *can* require an appraisal as proof your prop. has maintained its original value.  Ask 'em if they will.  They probably have a standard practice to avoid a frown-y face from their regulator(s). 

Also, note that actual achievement of 78% is irrelevant. The boilerplate you provided only discusses the "date first scheduled" to reach 78%.  That means the rules for 80% technically apply until the date you were  originally scheduled to reach 78%; so, paying down to 78% early doesn't necessarily guarantee cancellation. You might still have to "request" the cancellation, show the sustained  prop. value, have good payment history, etc.  Again, your lender can tell you how they handle the 78% point.  I think most will terminate PMI automatically when you achieve 78%, but there's probably lenders that try to take advantage of the "date first scheduled" loophole if they think the prop. value might have declined.

Good luck with your plans, whatever you decide to focus on first.   


mrgrump

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Re: PMI or Investing?
« Reply #19 on: January 27, 2014, 03:52:34 AM »
Eman resu, or user name backwards, I agree with you and the lender trying such a tactic. I will begin hounding them about 2 months out of when we will hit the threshold for PMI.

Bay island, thanks for the advice on cleaning it up before the appraisal. I would've thought an appraiser could look past such a thing as clutter but I guess not.


Heart of tin, you make a very compelling argument and I enjoyed the new viewpoint your calculations provided. I didn't even think back to my good finance and MBA days to run this number. Since life is unpredictable I think we will pay off the PMI portion of the house and then reevaluate. I think it will give us more stability and both strategies seem to be A and A+ quality.

Bryaday, the car remains at 0% for the life of the loan. Approxiamately 36/37 months.

Mister fancy pants, we are in the process of shifting the scottrade account to a vanguard ira. As far as the roi on taxes isn't this a little misleading since the taxes are only deferred not eliminated. I have read through the several strategies of converting traditional to roth but with a sizable account it seems like that could take years or you would eventually transfer enough to hit a tax bracket therefore eliminating the tax roi? Thankfully our state is not that high in taxes and the 529 is tax advantaged.

Thanks everybody.





Mister Fancypants

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Re: PMI or Investing?
« Reply #20 on: January 27, 2014, 11:18:24 AM »
MrGrump... I don't think it is misleading at all both Traditional IRA's and 401(k)'s are categorized as tax deferred that’s their nature and their benefit. You put money in now when you tax rate is higher and withdraw money later when your tax rate is lower. Now regardless of the fact that you are only deferring the tax on the income in the present if you have $1 and you put it in a tax deferred account you get the ROI of your marginal tax rate, if you pay down your mortgage to eliminate PMI or save interest the ROI is less. That $1 gets you a better return in a tax deferred account, so every dollar afterwards does too.

Like I said in my original post I always look at what my current situation is, I would not be concerned with your retirement tax rate or "whatifs" about house values when you sell, right now you are looking for the best bang for your buck, as your finances change you re-evaluate. You can consider more long term planning when you have no hair on fire emergencies.

I used to try to make decisions based on future scenarios and then when things changes I realized I never got it right, it’s like trying to time the market sometimes you get lucky, most times you lose. I find making the best decision for right now and taking action when things change like a new job, tax law changes, credit cards rewards, refi opportunities etc... Then you make new decisions based on new facts

Good luck :)

welliamwallace

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Re: PMI or Investing?
« Reply #21 on: April 29, 2014, 10:35:10 AM »
I've slightly modified Heart of Tin's spreadsheet to make it easier to plug in your own values. This is fantastic, and I haven't found anything similar any where else on the web. Check out the google document now https://docs.google.com/spreadsheet/ccc?key=0AublLf1JXQgkdEFrY0dabE1oeFloVlJraHFRYUVsZmc&usp=sharing#gid=0

One Question: If I set the PMI payment to $0, then my Annual Effective Internal Rate of return for any extra payment should be equal to the interest rate. However, it is slightly more. Any idea why?

Second of all: With this cash flow calculation, you don't realize the extra income from paying off the principle until the end of the mortgage. If I manually add a single extra $5,000 principle payment to the month that will result in achieving 80%LTV a few months early, I still see the same effective annual return as if I were putting any arbitrary amount of extra payment towards principle all along. That's because this model is looking at cash flow, and doesn't simply consider a principle payment as a transfer from one asset (cash) to another (home equity).

This goes against what I have commonly heard on the web: "The closer you get to 80% LTV, the higher the return on your extra payments." (e.g. If an extra $3,000 payment in month 20 gets you out of $1,000 worth of PMI for that year, It's a 33% return on your money!)

Any comment Heart of Tin? thanks for all the hard work.