Author Topic: Is there a calculator that helps decide if PMI is worth it?  (Read 11781 times)

rubybeth

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Is there a calculator or spreadsheet I could download somewhere to help me decide if paying less than a 20% down payment and paying PMI would be "worth it" in terms of saved rent and time?

Long story short: I'd like to save up for a down payment on a house after DH graduates next year (we'd buy once he's employed). House could be anywhere from $100k-$150k depending on what DH and and I decide to buy, but most likely in the middle of that at $125k. A 20% down payment would mean $25k, plus closing costs (maybe $5k?), plus we'd still want to keep about $10k in our accessible savings to cover emergencies or repairs or updates. But saving up $40k is going to take us a while, and while doing that, we'll be continuing to pay rent. If we could put less than 20% down and not pay 6 months of rent (or even more), it might end up being kind of a wash with PMI (or that's my logic). Or is this just a "bad idea" that should be avoided?

Other financial picture stuff: we are stashing a lot right now, and would continue to do this (457b, 401k) while saving for the down payment. It would just mean less going into IRAs for about two years.

Bracken_Joy

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #1 on: May 27, 2015, 10:27:59 AM »
I don't have an answer, but I am curious to see the answer!

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #2 on: May 27, 2015, 10:36:42 AM »
I think I may have found the answer to my own question: http://michaelbluejay.com/house/pmi.html

But I'm still not sure if it's a "good idea," though it might be a wash financially. Any thoughts on PMI vs. not? This would be a conventional loan, not an FHA loan. We both have excellent credit, no debt, etc.

forummm

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #3 on: May 27, 2015, 10:42:40 AM »
Will your mortgage with PMI be more, less, or about the same as your rent?


Related threads

http://forum.mrmoneymustache.com/investor-alley/pmi-or-investing/
https://www.bogleheads.org/forum/viewtopic.php?t=125112

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #4 on: May 27, 2015, 10:54:27 AM »
Will your mortgage with PMI be more, less, or about the same as your rent?

It depends somewhat on the house we buy, but let's assume a $125k house, with only 10% down. Our rent right now is $640/month, which will go up slightly over the next two years, but not much. Taxes tend to be about 1% on houses in our area, maybe slightly more, so assume $1,500 max for property taxes, and about $500 for insurance, so assume total PITI of around $660. Our utilities will be the significant increase vs. renting (Minnesota, so heating will be the major cost) but I think we've decided that buying is our preference for a variety of reasons.

Our house purchase price in no way reflects our incomes, which will likely be over $100k combined by the time we buy the house.

mlipps

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #5 on: May 27, 2015, 11:06:22 AM »
I don't know how to calculate it off hand, but I've seen others convert PMI to an effective interest rate. It seems that if you do that calculation, you could use the tremendously useful NY Times Rent v Buy Calculator. Just used it last night to accept a counteroffer on a house we are now buying!

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #6 on: May 27, 2015, 11:17:51 AM »
I don't know how to calculate it off hand, but I've seen others convert PMI to an effective interest rate. It seems that if you do that calculation, you could use the tremendously useful NY Times Rent v Buy Calculator. Just used it last night to accept a counteroffer on a house we are now buying!

I have used that calculator many times. I think PMI is something like .05%, I suppose I could call a lender and ask exactly how that is calculated. But I want to figure out an easy way of comparing say, saving 6-10 months worth of rent ($4-7k) but paying PMI for only 10% down, and if that would be worth it. We could likely buy in November 2017, but if we could buy May 2017 instead but pay PMI, I think it might be a wash and therefore "worth it" to be in a house sooner.

forummm

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #7 on: May 27, 2015, 11:23:53 AM »
Will your mortgage with PMI be more, less, or about the same as your rent?

It depends somewhat on the house we buy, but let's assume a $125k house, with only 10% down. Our rent right now is $640/month, which will go up slightly over the next two years, but not much. Taxes tend to be about 1% on houses in our area, maybe slightly more, so assume $1,500 max for property taxes, and about $500 for insurance, so assume total PITI of around $660. Our utilities will be the significant increase vs. renting (Minnesota, so heating will be the major cost) but I think we've decided that buying is our preference for a variety of reasons.

Our house purchase price in no way reflects our incomes, which will likely be over $100k combined by the time we buy the house.

So call it $550+$180 for PITI (some of which you keep). Plus $40 PMI.
https://aimloan.mortgagewebcenter.com/CheckRates/CheckRatesPost?Q585=1&Q586=112500&Q9727=125000&Q588=27&Q589=25&Q590=All&Q591=1&Q592=1&Q593=Y&Q594=1&Q4633=1&Q2098=N&Q9531=740

I'd call it a tossup. Since you prefer moving, you can do that. Get a private (non-FHA) loan so you can get rid of PMI sooner. And you can probably get the seller to pay your closing costs (even if it just means the purchase price is higher, that gets bundled into the loan so you don't need to come up with as much cash up front).

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #8 on: May 28, 2015, 06:46:36 AM »
Thanks, forummm. This would mean we could get pre-approval and start house shopping a lot earlier. :)

clarkm04

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #9 on: May 28, 2015, 07:56:57 AM »
If the difference in getting PMI versus not, is 6 months, you should just wait IMHO.

Getting PMI removed isn't automatic.  Lenders have different requirements and they move at different speeds with different hoops.

The biggest obstacle is that most require another full appraisal of the property.  In our case, we purchased a house June 2013.  Had to pay $450 for another appraisal April 2014 and then the PMI wasn't removed for another month or two while they reviewed our request and file.  The fee and the appraiser is also set by the bank, so there was no way to go cheaper.

The math still worked heavily in our favor since our PMI was $57 a month for 7.5 years based on the original mortgage schedule.

Your future lender will have lots of control over you and will require extra hoops since PMI is a nice banking fee.  This forum has posts about frustrations with lenders and getting PMI removed, so save yourself the headache and just avoid it.  There's a recent one, where a guy got to 80%, since his mortgage documents stated you can request PMI elimination at 80% LTV and called his lender.  They told him he had to get to 75% before they would review his file.

Not all lenders will play this game, my lender was very straightforward on what our requirements would be, but it still sucked to get another appraisal so soon.

In your shoes, if you want a $125 K house, save up at bare minimal 25 K for the down payment.

Have the seller cover your closing costs and pay for a 1-2 year warranty.  That will lighten the amount you have to save before pulling the trigger.

Best of luck!

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #10 on: May 28, 2015, 08:11:14 AM »
clarkm, the other factor that I didn't mention super directly is that sinking more money into the house upfront in terms of the down payment means we are saving less for FIRE temporarily. The lender I'm looking at lists the number of payments that include PMI, and the number that don't include PMI, plus the final payment. It looks really straightforward, but of course I would ask for more details when we go to get pre-approval.

I'm thinking what we'll do is get pre-approval in the spring when we've got about $20k saved, and we'll keep saving as we house shop. Once we find a place and make an offer, we may have $30k, or it may take us a while (we are maximizers) and by the time we find a place, we could have the full $40k. Or we may find a house that's only $115k and so only need the $30k anyway, or we make a lower offer and get what we want for a good price. Right now, I'm seeing multiple houses that meet our minimum criteria in our preferred neighborhoods between $109-$120k, and they may sell for less than that (been on the market a while), so it seems we could definitely get lucky with finding a less expensive house, or making a lower offer that gets accepted. But it's also possible that, after shopping around, we decide to continue saving for a $135k house or something, in which case we can always just save more and wait.

I'd really just prefer to move in the spring/summer/fall in Minnesota vs. in the dead of winter. :) Plus our lease runs out in the spring/summer and we'd switch to monthly, which would cost us more in rent while we house hunt.

Gone Fishing

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #11 on: May 28, 2015, 09:34:29 AM »
Rather than getting a loan with PMI, look for a second loan (typically at a higher rate) that you can knock out quickly.  80/20 and 80/10/10 mortgages with piggyback loans were common prior to the bust, disappeared afterwards, but are coming back.  If you have no luck with that, explore a 90% LTV HELOC to make up the difference. Or even for such a small amount you are looking at, I would even consider a 0% credit card offer or a cash out loan on a vehicle if the rate was less than 10% or so. 

Most of the numbers I have run on PMI put the effective rate at over 10% on the portion over 80% and it only gets worse as you pay the loan down until you can get rid of the PMI as it is a fixed expense vs interest that would decrease as you paydown the loan, so it is usually well worth borrowing at a higher rate to avoid it. 

If you are in the 15% or less tax bracket, I would forgo some tax deferred contributions if it meant not having to pay PMI.  When you buy, you will pick up the interest deduction that will help offset deduction you lost by not contributing to your tax deferred accounts.  I would even use a good portion of your emergency funds for the down payment if needed to avoid PMI as long as you felt like you could replenish them in a few months.  You could use a low interest credit card in a true emergency, or worst case senario draw from the 457.  In my experience, young households with two responsible income earners don't have much in the way of true emergencies that can not be handled out of current cash flow.

If you can't tell, I REALLY don't like PMI!     
« Last Edit: May 28, 2015, 09:36:02 AM by So Close »

zephyr911

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #12 on: May 28, 2015, 11:00:27 AM »
I ran several scenarios for our latest buy, which cost $122K. I started with the highest LTV we were offered (96.5% FHA) and calculated the annual cost of financing over the first few years.
Then I looked at the best loan I could get at 95%, and worked out the annual cost savings as a percentage of the additional down payment. I repeated this with a 10% down payment (90% LTV with PMI), and a 20% down payment (80% conventional loan, no PMI), and made myself a little chart showing each funding increment and the associated ROI. It was a case of initially high but rapidly diminishing returns - going from 96.5% to 95% paid for itself in months (100%+); adding ~$6K to get from 95 to 90% produced something like 22% ROI, but the final $12K to get out of PMI only paid about 7%. We opted to invest the $12K, but have been gradually drawing down the balance and will lose our $32/mo PMI later this year. It just wasn't a priority at the time in light of expected returns elsewhere.
My usual lenders weren't offering 80/20 loans at the time but it's a good theory. Just make sure you're working through the total cost of each option and maximizing bang for your buck with the down payment.

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #13 on: May 28, 2015, 12:01:58 PM »
I could definitely drop back on the 457b contributions. And I suppose it's true we don't need that $10k cushion, but I like to have it "just in case," and I'm envisioning buying a few things for the house and maybe painting or other small updates (plus you always hear stories about a water heater that goes out within the first few months of buying, or other major necessity). If a true emergency happened, we'd likely be totally fine with credit cards to cover for a few months, or tap my extremely helpful parents. I just don't like the idea of having nothing in the bank, even if we could build back to that $10k cushion in less than 6 months.

A lot of unknowns right now, so will wait and see. Thanks for all of the advice, keep it coming if you have more! :)

Insanity

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #14 on: May 28, 2015, 01:42:54 PM »
I have to admit, my original thought was -  there never is a time where PMI is worth it.  But never say never.

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #15 on: May 29, 2015, 06:52:54 AM »
I have to admit, my original thought was -  there never is a time where PMI is worth it.  But never say never.

But in purely financial terms, let's say you'll pay $4,000 in PMI payments over the life of the loan, but save $7,000 in rent. It also means you only sink $12,500 (plus closing costs) into the house right off the bat, and so can invest an additional $11,000 into an IRA in the same year you buy the house. Let's say that the money in the IRA has simple monthly compounding interest at 5%--in 10 years, your IRA funds are at $18,000. So you saved $3,000 in rent payments, plus made $7,000 on your IRA, coming out $10,000 ahead. Even if you have to pay to have your house re-appraised to ditch the PMI (which costs, what, $500-$1,000?), you still come out $9,000 ahead 10 years after buying the house.

I'm not saying PMI is "good" but it might be better for us than paying rent for longer to save up a larger down payment, plus be better timing with our lease ending and moving into a house in decent weather vs. sub-zero temps.

Also, it's my understanding that PMI is based somewhat on your finances and credit history, not just a flat percentage for everyone. DH and I are financial unicorns compared to most people buying houses--we have no debt, very high credit scores, and more than enough income to cover the mortgage payment each month.

Insanity

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #16 on: May 29, 2015, 07:47:33 AM »
Rubybeth - that is the reason for never say never :).  I had never thought about it that way. 

PMI is partially based on credit for one reason - the mortgage insurer will sometimes run their own credit checks of the borrow (my current client provided PMI -  which is ultimately an insurance for the lender, and the borrower is paying for that insurance an most likely a fee on top of it).

Good luck!! 

clarkm04

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #17 on: May 29, 2015, 09:08:36 AM »
You are correct, PMI is based on finances, credit history, loan amount, etc.

There are PMI calculators online.  Before we got our loan, I used a couple of them and they were within $2 of the actual PMI amount.

At the closing, read through the PMI elimination portion and ask questions of the lender.

Every lender is slightly different on what it takes to eliminate PMI and that's where frustrations come in for buyers that they make assumptions.

Common areas of frustration:
- Appraisal: Many will require an appraisal regardless of how soon you have purchased the property and the bank has a set charge you have to pay for this.

- Good payment history: Some lenders claim this is making payments for two years.  Luckily, our lender didn't use this benchmark, but I know others that have.

- Lender dragging their feet: PMI is sheer bank profit, so some drag their feet in responding to your initial request, reviewing your file, and eliminating PMI.  Again, our lender was very fast and everything got resolved within 60 days, but I know it's taken longer.

For us, was getting a PMI a good thing?  Probably.  We got into a great house in the area we wanted and got the PMI removed after 10 months.  It was an extra $1200 for the payments, new appraisal, and other fees than if we had the 20% to start with.  If we waited to get 20%, it would have meant another year in our apartment and not finding such a steal of a house (The seller sold 20% under market value).

I think it's good you are looking at all the angles and making what you feel is the best decision for you and your husband.

Good luck on your upcoming home purchase!

zephyr911

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #18 on: May 29, 2015, 11:46:09 AM »
Even if you have to pay to have your house re-appraised to ditch the PMI (which costs, what, $500-$1,000?), you still come out $9,000 ahead 10 years after buying the house.
Residential appraisal should only be 3-500.

thd7t

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #19 on: June 01, 2015, 12:01:07 PM »
People have given a lot of good examples of when PMI is a good idea.  I'm going to play devil's advocate a little.  You gave an example of PMI being 0.05% of the loan.  In this case, it would be $125,000 x .0005=$62.50/month.  However, that means that annually, it comes to $750/year.  This is still only 0.6%, except it's not really.  This is really only interest on the next 10% (or 12%) of your loan, so really, it's 6% of a $11,250 loan that you're already paying around 4% on.  Effectively, a 10% rate on the top 10% of your mortgage, the first year.  PMI typically lasts for a minimum of 24 months. 

If you pay $5,625 in principal the first year, you are still paying $750/year in PMI.  For the second year, this means that the effective rate of your PMI is 16% on your remaining $5,625.  This means that you've had a two year loan of $11,250 at a rate of 13%.  In addition, some lenders require another appraisal to remove PMI before term, no matter what, which tacks an additional $300-ish to that cost.

This leads to a reasonable question: is a 13% loan (plus $300 appraisal fees) worth it?  In addition, if you don't pay down principal quickly, the effective interest rate of the PMI goes even higher.  It's not as straightforward as it looks.

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #20 on: June 01, 2015, 03:39:06 PM »
People have given a lot of good examples of when PMI is a good idea.  I'm going to play devil's advocate a little.  You gave an example of PMI being 0.05% of the loan.  In this case, it would be $125,000 x .0005=$62.50/month.  However, that means that annually, it comes to $750/year.  This is still only 0.6%, except it's not really.  This is really only interest on the next 10% (or 12%) of your loan, so really, it's 6% of a $11,250 loan that you're already paying around 4% on.  Effectively, a 10% rate on the top 10% of your mortgage, the first year.  PMI typically lasts for a minimum of 24 months. 

If you pay $5,625 in principal the first year, you are still paying $750/year in PMI.  For the second year, this means that the effective rate of your PMI is 16% on your remaining $5,625.  This means that you've had a two year loan of $11,250 at a rate of 13%.  In addition, some lenders require another appraisal to remove PMI before term, no matter what, which tacks an additional $300-ish to that cost.

This leads to a reasonable question: is a 13% loan (plus $300 appraisal fees) worth it?  In addition, if you don't pay down principal quickly, the effective interest rate of the PMI goes even higher.  It's not as straightforward as it looks.

Thanks for running these numbers. I'm not looking at percentages so much as actual dollars spent. On the bank's mortgage page I'm looking at in my area, PMI on a loan of $112,500 for a $125,000 house is roughly $58.13/mo for 79 months, which would be $4,592.27 total (or $697.56 in one year, which is just a bit more than one month's rent), plus likely a new appraisal of $500 maximum on a $125,000 house. And I guess we'd always have the option to pay down the principal and get the reappraisal done sooner, but I'm thinking that I might rather keep those dollars working for me in the stock market vs. doing not much at all for me in my dwelling.

rocksinmyhead

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #21 on: June 01, 2015, 04:10:30 PM »
okay I didn't read this in super duper detail so sorry if you said this already... but I am in the process of buying my first house (if inspections don't turn up anything horrid this week) in a similar price range ($150k) and I've been spreadsheeting the shit out of it. you mention saving $5k-7k on rent. I don't know what part of MN you're in or what rents are like, but just keep in mind you should be comparing rental costs to monthly interest + insurance + property tax + PMI + maintenance costs (+ utilities if those are currently included in your rent), maybe even + amortized closing costs/potential loss on resale if you aren't planning on being there forever and want to run a bazillion different scenarios like I did :) so if your current rent is $1200/month, and all the costs I mentioned (basically everything except principal) add up to $800 a month, you're really only saving $400/month not $1200.

sorry if that was really obvious and you already incorporated it, I was just personally surprised at how much all those costs added up to when I ran the numbers for myself :)

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #22 on: June 02, 2015, 06:32:13 AM »
sorry if that was really obvious and you already incorporated it, I was just personally surprised at how much all those costs added up to when I ran the numbers for myself :)

This exercise isn't to compare renting vs. buying. It's to decide if buying a house in May with only a 10% down payment would be a financial wash vs. buying a house in November with a 20% down payment. I'm not in the Minneapolis area, so rent costs are much lower than $1,200. We're paying $640/mo, only pay electric. :)

I've run many rent vs. buy calculators (my favorite is the Michael Bluejay calculator), and it can really go either way for us. We've been married nearly 7 years and have rented that whole time, but I think we've agreed we want to buy a house. If we hate owning, we can always go back to renting. Depending on very slight changes in the numbers, either renting or buying could be a better deal for us (but we don't control the rent the way we would control the cost of the house). The cheaper the house, the better deal buying is, but of course, we don't know what kind of houses we can actually buy until we are pre-approved and make an offer. :)

I'm just comparing numbers to see if PMI to get into a house at least 6 months earlier (maybe even earlier than that) would cost me more or less than rent. My question isn't really if buying is a better deal, it's whether paying PMI is worth it in terms of saved rent and opportunity cost on dollars sunk into a down payment vs. other untaxed investment (457b or IRA).

I am using this calculator to get an estimate on our payment, and it would be about $717.88, dropping to $661.63 after PMI is done ($125k house, 10% down, 3.75 interest rate, 1% property taxes, with .6% PMI): http://usmortgagecalculator.org/

thd7t

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #23 on: June 02, 2015, 06:46:17 AM »
People have given a lot of good examples of when PMI is a good idea.  I'm going to play devil's advocate a little.  You gave an example of PMI being 0.05% of the loan.  In this case, it would be $125,000 x .0005=$62.50/month.  However, that means that annually, it comes to $750/year.  This is still only 0.6%, except it's not really.  This is really only interest on the next 10% (or 12%) of your loan, so really, it's 6% of a $11,250 loan that you're already paying around 4% on.  Effectively, a 10% rate on the top 10% of your mortgage, the first year.  PMI typically lasts for a minimum of 24 months. 

If you pay $5,625 in principal the first year, you are still paying $750/year in PMI.  For the second year, this means that the effective rate of your PMI is 16% on your remaining $5,625.  This means that you've had a two year loan of $11,250 at a rate of 13%.  In addition, some lenders require another appraisal to remove PMI before term, no matter what, which tacks an additional $300-ish to that cost.

This leads to a reasonable question: is a 13% loan (plus $300 appraisal fees) worth it?  In addition, if you don't pay down principal quickly, the effective interest rate of the PMI goes even higher.  It's not as straightforward as it looks.

Thanks for running these numbers. I'm not looking at percentages so much as actual dollars spent. On the bank's mortgage page I'm looking at in my area, PMI on a loan of $112,500 for a $125,000 house is roughly $58.13/mo for 79 months, which would be $4,592.27 total (or $697.56 in one year, which is just a bit more than one month's rent), plus likely a new appraisal of $500 maximum on a $125,000 house. And I guess we'd always have the option to pay down the principal and get the reappraisal done sooner, but I'm thinking that I might rather keep those dollars working for me in the stock market vs. doing not much at all for me in my dwelling.
As I mentioned, you've seen a lot of good calculations showing why PMI could be a good investment.  However, it's valuable to look at it's true rate, particularly when you say you'd rather have the dollars working for you in the stock market.  If you are paying for 79 months, your return in the market will have to be really high, because longer PMI terms have higher effective rates.  13% was the bare minimum on carrying PMI for two years.  If it extends for 6.5 years, you'll be in the upper teens or possibly low 20% range (hair on fire!).  At that point, you'll do better paying the mortgage down to remove the PMI.  The absolute dollar number is important, but if you use it, you have to calculate your market returns to get a fair comparison. 

rocksinmyhead

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #24 on: June 02, 2015, 06:49:56 AM »
right, but I guess I just meant be careful in how you calculate "saved rent". and I feel like you ARE comparing renting vs. buying, but over a finite (and relatively short) period and with PMI included... right? like, you want to know if over the next 6 months, you'll be "throwing away" more in rent than you would be paying PMI etc?

but I think I get your point, that you're not struggling with that part of the calculation but rather how to determine exactly how much PMI will cost you and what the opportunity cost would be on putting 20% down... I just got hung up on the "saved rent" part :)

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #25 on: June 02, 2015, 06:53:37 AM »
As I mentioned, you've seen a lot of good calculations showing why PMI could be a good investment.  However, it's valuable to look at it's true rate, particularly when you say you'd rather have the dollars working for you in the stock market.  If you are paying for 79 months, your return in the market will have to be really high, because longer PMI terms have higher effective rates.  13% was the bare minimum on carrying PMI for two years.  If it extends for 6.5 years, you'll be in the upper teens or possibly low 20% range (hair on fire!).  At that point, you'll do better paying the mortgage down to remove the PMI.  The absolute dollar number is important, but if you use it, you have to calculate your market returns to get a fair comparison.

Good points. I'll definitely be thinking more about this for a while, because the earliest we could get pre-approved is sometime in 2017. A lot depends on DH's future job and how much we can save between now and then.

thd7t

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #26 on: June 02, 2015, 07:36:15 AM »
Being over a year out puts you at a big advantage.  Best of luck!

theoverlook

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #27 on: June 02, 2015, 01:17:45 PM »
I don't think looking at PMI as a loan with a high interest percentage is quite right.  It doesn't matter what the "percent" is if it's saving you money over the alternative.

Ie, if you're saving $200/mo over renting - or even if the payment is the exact same but you're paying $200/mo in principal - then why worry about what the effective rate is on the PMI portion of the loan?

It would make sense if comparing it to returns achieved by investing in the market, but when comparing it to rent it doesn't make sense.

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #28 on: June 02, 2015, 01:27:32 PM »
right, but I guess I just meant be careful in how you calculate "saved rent". and I feel like you ARE comparing renting vs. buying, but over a finite (and relatively short) period and with PMI included... right? like, you want to know if over the next 6 months, you'll be "throwing away" more in rent than you would be paying PMI etc?

but I think I get your point, that you're not struggling with that part of the calculation but rather how to determine exactly how much PMI will cost you and what the opportunity cost would be on putting 20% down... I just got hung up on the "saved rent" part :)

Kind of. I figure we have to pay for somewhere to live, either way. With renting, it's going to cost us, in real dollars, something slightly more than $640/mo. If we buy, it could be around that same amount or likely slightly more, with some of the payment going toward principal and the rest going toward other super fun stuff (taxes, insurance, PMI, etc.). We'd be paying the cost to live somewhere regardless of what that's actually paying for. I understand that the interest rate looks bad, but in actual dollars, it might cost us less money to just get into a house sooner than continue to pay rent for another 6 months or more in order to save up to the $40k I'd like to have somewhat arbitrarily.

We have many factors that are unknown at this point, so it was mainly a thought experiment. But I think this helped me decide that we could, at the very least, walk into a bank in the spring of 2017 with around $20k in cash and get pre-approval for a loan of $100-150k, and keep saving up while we house hunt. If we find a deal, we may not need as much, but if we don't find anything we like, we can keep saving and biding our time.

I don't think looking at PMI as a loan with a high interest percentage is quite right.  It doesn't matter what the "percent" is if it's saving you money over the alternative.

Ie, if you're saving $200/mo over renting - or even if the payment is the exact same but you're paying $200/mo in principal - then why worry about what the effective rate is on the PMI portion of the loan?

It would make sense if comparing it to returns achieved by investing in the market, but when comparing it to rent it doesn't make sense.

Right, I was trying to figure out the cost in real dollars, not a percentage. It may look bad on paper to pay PMI, but in some scenarios (like ours), it might actually work out in our favor.

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #29 on: June 02, 2015, 01:30:25 PM »
I don't think looking at PMI as a loan with a high interest percentage is quite right.  It doesn't matter what the "percent" is if it's saving you money over the alternative.

Ie, if you're saving $200/mo over renting - or even if the payment is the exact same but you're paying $200/mo in principal - then why worry about what the effective rate is on the PMI portion of the loan?

It would make sense if comparing it to returns achieved by investing in the market, but when comparing it to rent it doesn't make sense.
Of course it matters.  If I told you that you could take out a loan amortized over 10 years at 10% interest and would cut your rent by $150, would it matter that it was debt or if I structured it as a "$132" payment?  Either way, you're spending the same amount to get a savings.  Looking at it as an interest rate makes it an apples to apples comparison to the rest of a mortgage (and to the possible alternative of a piggyback loan).

theoverlook

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #30 on: June 02, 2015, 02:46:23 PM »
I don't think looking at PMI as a loan with a high interest percentage is quite right.  It doesn't matter what the "percent" is if it's saving you money over the alternative.

Ie, if you're saving $200/mo over renting - or even if the payment is the exact same but you're paying $200/mo in principal - then why worry about what the effective rate is on the PMI portion of the loan?

It would make sense if comparing it to returns achieved by investing in the market, but when comparing it to rent it doesn't make sense.
Of course it matters.  If I told you that you could take out a loan amortized over 10 years at 10% interest and would cut your rent by $150, would it matter that it was debt or if I structured it as a "$132" payment?  Either way, you're spending the same amount to get a savings.  Looking at it as an interest rate makes it an apples to apples comparison to the rest of a mortgage (and to the possible alternative of a piggyback loan).

No, the interest rate wouldn't be the important thing, the difference between the debt service and the savings would.  Ie, a loan at 32% interest that costs $100 to service for 24 months but saves you $200 per month over that same period is a better deal than not taking that loan.  What matters is the net cost (or net savings).

So looking at it as an interest rate doesn't make sense if it's a total return question.

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #31 on: June 02, 2015, 03:05:12 PM »
I don't think looking at PMI as a loan with a high interest percentage is quite right.  It doesn't matter what the "percent" is if it's saving you money over the alternative.

Ie, if you're saving $200/mo over renting - or even if the payment is the exact same but you're paying $200/mo in principal - then why worry about what the effective rate is on the PMI portion of the loan?

It would make sense if comparing it to returns achieved by investing in the market, but when comparing it to rent it doesn't make sense.
Of course it matters.  If I told you that you could take out a loan amortized over 10 years at 10% interest and would cut your rent by $150, would it matter that it was debt or if I structured it as a "$132" payment?  Either way, you're spending the same amount to get a savings.  Looking at it as an interest rate makes it an apples to apples comparison to the rest of a mortgage (and to the possible alternative of a piggyback loan).

No, the interest rate wouldn't be the important thing, the difference between the debt service and the savings would.  Ie, a loan at 32% interest that costs $100 to service for 24 months but saves you $200 per month over that same period is a better deal than not taking that loan.  What matters is the net cost (or net savings).

So looking at it as an interest rate doesn't make sense if it's a total return question.
That is a small picture way of looking at it.  For example, OP could take out a personal loan at a bad rate (8%) for the $11,250 that it would take to get to 80% LTV and eliminate PMI.  A 79 month personal loan at 8% would cost a total of $3,258 in interest instead of paying $4600 in PMI and $1,565 in interest on that portion of the mortgage over the same time.  The payment would be higher at $183, but it would reduce the mortgage by $54/month and eliminate $58/month for PMI.  Admittedly, it's costing $70/month more for the duration of the loan, but the total savings is $2907. 

That was an example of a bad loan for the same duration as the PMI.  Many lenders are still offering piggyback loans at attractive rates.  The total out of pocket would probably be lower than taking PMI, both monthly and over the duration.

PMI might be saving money over renting, but if there are options that save money over PMI, they should be considered in an apples-to-apples comparison.

ETA: I forgot to apply the mortgage interest to the additional money in the mortgage for my original calculation and only got a $1342 improvement.  Actual improvement is almost $3k.  At that point, We could probably use a 10% personal loan for 10 years, get a cheaper monthly payment than the original scheme and pay less interest over all.
« Last Edit: June 02, 2015, 03:15:51 PM by thd7t »

theoverlook

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #32 on: June 02, 2015, 03:27:13 PM »
thd7t, I see what you're saying and that partially makes sense.  BUT caution on the personal loan - don't do that as it will affect your ability to secure the mortgage on the home!  A piggyback loan would work and I've done that once before with a 10% HELOC issued at closing, but the personal loan is a bad idea.  Even advancing it on a credit card can wreck your qualification for the mortgage - and they will ask where the funds have come from.

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #33 on: June 03, 2015, 06:45:54 AM »
thd7t, I see what you're saying and that partially makes sense.  BUT caution on the personal loan - don't do that as it will affect your ability to secure the mortgage on the home!  A piggyback loan would work and I've done that once before with a 10% HELOC issued at closing, but the personal loan is a bad idea.  Even advancing it on a credit card can wreck your qualification for the mortgage - and they will ask where the funds have come from.
overlook, agreed that the personal loan is a bad choice.  I was trying to give an egregiously bad example to show that PMI is not as good an option as it looks on the surface and to show that while it could lead to an improvement over renting, there would be cases where an intentionally bad selection could lead to higher optimization.

As I wrote it, I realized that I was getting a little too far into my argument and realized that I should clarify that a HELOC would be a more appropriate way to look at this.  I was a little stuck on demonstrating the value of looking at PMI as a loan equivalent.  I still hold that position, but I agree that I veered into a bad comparison.

Dicey

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #34 on: June 03, 2015, 01:16:12 PM »
In saving for my very first house, I knew I was going to spend the money when I found the right one, so I did not put it in a Roth or 401k. When I found the right house, I put less than 20% down for the same reason as you, despite the fact that I had a year's salary saved. Oh, how I hated that PMI!

Fast forward (ahem) thirty years and I now have a million-dollar paid-for home, rental property in a resort area with 50% equity and over $1M in other investments. I could not have achieved this had I not bought that first house with PMI. Not such a bad return on my investment after all. Also worth noting was that I didn't make all that much on the first property, but it saved me a ton of taxes and got me in the game. Leverage and good frugal habits got me where I am today.

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #35 on: June 05, 2015, 02:40:25 PM »
I've been looking at buying a house and built a rent vs buy model.

Part of what I did was look at what happened to NPV as % down payment increased as a function of market returns.

The trade-off is pay more in down payment and have less in the market, but of course we don't know what market returns will be. Note the below graph is for market returns of 0-10% for the life of analysis (assuming one lives to mid 90s - I'm generous). The market interest is nominal, not real. It's also assuming a 30 year mortgage at 4%.

This also assumes you are buying the house to live in for life, and the house only appreciates at inflation rate. I used this assumption because that is the historical trend for the average house, except in recent times. I'm also of the opinion that houses cannot keep increasing past inflation (on average) or eventually we hit a point where no one can afford housing. The only reason this matters is because it implies there is no lost equity gain by delaying a house purchase in order to increase the down payment.

The line is the fraction of present value compared to paying 1% down. Anything above 1 means you are increasing present value and anything below 1 means you are decreasing present value. It behaves as you would expect with increasing down payment being beneficial in low market returns and negative in high market returns. You can see that at 4% market return the line is basically flat once you pay enough to avoid PMI, which is also what we would expect.


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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #36 on: June 08, 2015, 06:46:51 AM »
I've been looking at buying a house and built a rent vs buy model.

Part of what I did was look at what happened to NPV as % down payment increased as a function of market returns.

The trade-off is pay more in down payment and have less in the market, but of course we don't know what market returns will be. Note the below graph is for market returns of 0-10% for the life of analysis (assuming one lives to mid 90s - I'm generous). The market interest is nominal, not real. It's also assuming a 30 year mortgage at 4%.

This also assumes you are buying the house to live in for life, and the house only appreciates at inflation rate. I used this assumption because that is the historical trend for the average house, except in recent times. I'm also of the opinion that houses cannot keep increasing past inflation (on average) or eventually we hit a point where no one can afford housing. The only reason this matters is because it implies there is no lost equity gain by delaying a house purchase in order to increase the down payment.

The line is the fraction of present value compared to paying 1% down. Anything above 1 means you are increasing present value and anything below 1 means you are decreasing present value. It behaves as you would expect with increasing down payment being beneficial in low market returns and negative in high market returns. You can see that at 4% market return the line is basically flat once you pay enough to avoid PMI, which is also what we would expect.


Could you try to reattach the graph?  It's not coming up for me.

nedwin

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #37 on: June 09, 2015, 05:49:02 PM »
Rubybeth - Be very careful with regard to the terms to eliminate PMI early.  Have it in writing when you begin your application so that you know what to expect.  Also have a solid estimate for the pmi premiums.  My loan is serviced by US Bank.  To have PMI removed in less than two years I would have to pay down to 80% LTV or complete substantial renovations on the property that raised its value significantly.  To remove PMI after two years I have to also pay down principle or the current value of the home has to have increased to 75% LTV.  I would also have to pay for an appraisal, which US Bank estimates to cost $440.  My pmi premium is $44.99/month.  We put 10% down, and the original principle balance was over $200k.  I am fairly sure the home has appreciated to 75% LTV in the two years we've owned it, so will likely take the chance and pay for the appraisal.

That being said, I think PMI is not necessarily as evil as others on this forum believe.  It allowed us to buy a great home in a good school district with 10% down at the very lowest interest rates in history (3.25%/30 years).  Without it we would have been saving for another year or two.  During that timeframe, homes in my neighborhood (and town as a whole) have appreciated significantly, to the point that we probably could not (or would not?) afford to buy the same today.  We would have constantly been chasing the 20% figure.  and Interest rates have gone up some since then.  Using thd7t's formula, our pmi premium is an additional 2.25% interest on the 10% we did not put down.  Pretty cheap money, I think.

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #38 on: June 10, 2015, 08:04:29 AM »
That being said, I think PMI is not necessarily as evil as others on this forum believe.  It allowed us to buy a great home in a good school district with 10% down at the very lowest interest rates in history (3.25%/30 years).  Without it we would have been saving for another year or two.  During that timeframe, homes in my neighborhood (and town as a whole) have appreciated significantly, to the point that we probably could not (or would not?) afford to buy the same today.  We would have constantly been chasing the 20% figure.  and Interest rates have gone up some since then.  Using thd7t's formula, our pmi premium is an additional 2.25% interest on the 10% we did not put down.  Pretty cheap money, I think.

Yes, I would absolutely clarify terms of removal of PMI before doing this option, and have everything in writing. And your story about being able to buy a house with 10% and a great interest rate is exactly what I'm thinking may happen for us. Right now, I'm checking a local bank's mortgage rate, and we could qualify for a great rate, or buy points that would likely pay off (Michael Bluejay has a "is it worth it to pay points" calculator on his site  that is helpful to think about this).

And in case I haven't mentioned it, we would likely stay in our house for a long time, easily more than 10 years if not longer. Not to get too detailed, but it's likely I'll end up owning my parents' house when they are gone from this earth, and by then we'd likely be fully retired and location wouldn't matter as much (their house is in a great neighborhood on the opposite end of our city from where we live and would likely buy).

charis

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #39 on: June 10, 2015, 08:21:29 AM »
That being said, I think PMI is not necessarily as evil as others on this forum believe.  It allowed us to buy a great home in a good school district with 10% down at the very lowest interest rates in history (3.25%/30 years).  Without it we would have been saving for another year or two.  During that timeframe, homes in my neighborhood (and town as a whole) have appreciated significantly, to the point that we probably could not (or would not?) afford to buy the same today.

This is our story too.  We actually got a FHA loan with the 5% down and PMI.  But, (a) it was a good house in a great neighborhood that came up for a great deal (outdated, deceased prior owners, kids living out of state looking to sell quick), (b) it was then end of 2008 and the house value has appreciated almost $40K ($50K over what we paid) in a LCOL city, (c) we almost immediately got $8K back from the 1st time home buyers credit, (d) we refinanced (into a conventional loan) later on for a  better rate and got rid of the PMI.

If I could do it over again, I would do the exact same thing.

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #40 on: June 10, 2015, 12:37:09 PM »
That being said, I think PMI is not necessarily as evil as others on this forum believe.  It allowed us to buy a great home in a good school district with 10% down at the very lowest interest rates in history (3.25%/30 years).  Without it we would have been saving for another year or two.  During that timeframe, homes in my neighborhood (and town as a whole) have appreciated significantly, to the point that we probably could not (or would not?) afford to buy the same today.

This is our story too.  We actually got a FHA loan with the 5% down and PMI.  But, (a) it was a good house in a great neighborhood that came up for a great deal (outdated, deceased prior owners, kids living out of state looking to sell quick), (b) it was then end of 2008 and the house value has appreciated almost $40K ($50K over what we paid) in a LCOL city, (c) we almost immediately got $8K back from the 1st time home buyers credit, (d) we refinanced (into a conventional loan) later on for a  better rate and got rid of the PMI.

If I could do it over again, I would do the exact same thing.

This^. Or, to be more correct, both of these^^. PMI can be a terrible enabler for spendthrifts. For folks with mustachian habits, it can be a great (if hated) tool for creating wealth. Sure 20% down is preferred, but PMI provides a leg up, if applied correctly.

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #41 on: June 10, 2015, 03:23:19 PM »
That being said, I think PMI is not necessarily as evil as others on this forum believe.  It allowed us to buy a great home in a good school district with 10% down at the very lowest interest rates in history (3.25%/30 years).  Without it we would have been saving for another year or two.  During that timeframe, homes in my neighborhood (and town as a whole) have appreciated significantly, to the point that we probably could not (or would not?) afford to buy the same today.

This is our story too.  We actually got a FHA loan with the 5% down and PMI.  But, (a) it was a good house in a great neighborhood that came up for a great deal (outdated, deceased prior owners, kids living out of state looking to sell quick), (b) it was then end of 2008 and the house value has appreciated almost $40K ($50K over what we paid) in a LCOL city, (c) we almost immediately got $8K back from the 1st time home buyers credit, (d) we refinanced (into a conventional loan) later on for a  better rate and got rid of the PMI.

If I could do it over again, I would do the exact same thing.

This^. Or, to be more correct, both of these^^. PMI can be a terrible enabler for spendthrifts. For folks with mustachian habits, it can be a great (if hated) tool for creating wealth. Sure 20% down is preferred, but PMI provides a leg up, if applied correctly.
As the only person who has spoken against PMI in this thread, I should disclose that I did use it to purchase my house (I have since eliminated it).  However, my point was to demonstrate that in a lot of cases (including OP's) it is a more expensive way to get money than it appears on its face and buyers should be careful to make apples-to-apples comparisons of their options when purchasing a house.  I do agree that sometimes, PMI will be the right tool to buy.

rubybeth

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #42 on: June 11, 2015, 07:07:41 AM »
As the only person who has spoken against PMI in this thread, I should disclose that I did use it to purchase my house (I have since eliminated it).  However, my point was to demonstrate that in a lot of cases (including OP's) it is a more expensive way to get money than it appears on its face and buyers should be careful to make apples-to-apples comparisons of their options when purchasing a house.  I do agree that sometimes, PMI will be the right tool to buy.

Good point. Thank you for your perspective, I really do want to hear the good and the bad!

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #43 on: June 11, 2015, 08:07:00 AM »
Very interesting discussion going on in here. I'm currently home shopping and most likely will have PMI if I decide to buy.....
I didn't realize lenders put you through so many loop holes in order to eliminate the PMI, I've talked to lenders about getting piggybacks but it seems like something they aren't eager to do. They really want you to get PMI and have it as long as possible for obvious reasons. I may need to play around with some of the calculation models being used in this thread to evaluate my situation with PMI, piggyback (usually an ARM), and even taking out separate loans/CC.

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #44 on: June 11, 2015, 10:22:32 AM »
Very interesting discussion going on in here. I'm currently home shopping and most likely will have PMI if I decide to buy.....
I didn't realize lenders put you through so many loop holes in order to eliminate the PMI, I've talked to lenders about getting piggybacks but it seems like something they aren't eager to do. They really want you to get PMI and have it as long as possible for obvious reasons. I may need to play around with some of the calculation models being used in this thread to evaluate my situation with PMI, piggyback (usually an ARM), and even taking out separate loans/CC.
As others have mentioned upthread, be careful taking separate loans or trying to use a Credit Card for mortgage downpayment, it can hurt your ability to get the loan.  Many mortgages are based on a specific amount of credit/credit use.  If you can work it out with your lender, it could be a good plan, but take care.

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #45 on: June 11, 2015, 12:31:52 PM »
An update on my PMI situation:
I checked in with my bank after some major improvements put us over 20% equity, and was quite displeased to hear that they generally do not consider dropping PMI for at least two years, regardless of LTV or any other factors.
I'm generally pretty good at reading fine print and asking detailed questions, and since we planned on ditching PMI within a year and did everything possible to ensure that was a realistic goal, I'm a little perplexed (read: pissed). Looking to dig into the closing package and see if the bank disclosed that anywhere... if not, I'm going to be very unhappy with them. From my ongoing reading as a result of this, I understand that it's a legal requirement in some cases - I just don't appreciate that being glossed over beforehand.
There's supposedly a letter in the mail explaining the conditions in more detail. If we were misled, we may well refi out of the loan entirely - because we can get a better APR on a 15-year conventional now, and because fuck this bank.
We're in a much stronger financial position than 8 months ago, and can definitely get under 80% LTV if we're not there already. Skipping two months' payments and dumping the difference into stocks would be icing on the cake.

thd7t

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #46 on: June 11, 2015, 01:13:06 PM »
An update on my PMI situation:
I checked in with my bank after some major improvements put us over 20% equity, and was quite displeased to hear that they generally do not consider dropping PMI for at least two years, regardless of LTV or any other factors.
I'm generally pretty good at reading fine print and asking detailed questions, and since we planned on ditching PMI within a year and did everything possible to ensure that was a realistic goal, I'm a little perplexed (read: pissed). Looking to dig into the closing package and see if the bank disclosed that anywhere... if not, I'm going to be very unhappy with them. From my ongoing reading as a result of this, I understand that it's a legal requirement in some cases - I just don't appreciate that being glossed over beforehand.
There's supposedly a letter in the mail explaining the conditions in more detail. If we were misled, we may well refi out of the loan entirely - because we can get a better APR on a 15-year conventional now, and because fuck this bank.
We're in a much stronger financial position than 8 months ago, and can definitely get under 80% LTV if we're not there already. Skipping two months' payments and dumping the difference into stocks would be icing on the cake.
Conventional mortgages usually have a 24 month minimum term for PMI.  FHA it's usually 60 months or duration of the loan.  However, when we had an FHA loan, I don't think they were willing to remove MI until the loan was paid to 78% LTV.  We ended up taking the refi route.

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #47 on: June 11, 2015, 01:46:59 PM »
Conventional mortgages usually have a 24 month minimum term for PMI.  FHA it's usually 60 months or duration of the loan.  However, when we had an FHA loan, I don't think they were willing to remove MI until the loan was paid to 78% LTV.  We ended up taking the refi route.
Like I said, my main problem was expectation management. I made a pointed effort to get them to disclose ALL criteria. This was not discussed, and if it was in the closing package at all, it was buried somewhere in extremely fine print.
The absolute worst case here is about $500 over the next 16 months. Lately that's like 3 days worth of savings, so who cares, right? But I have a real, visceral reaction to this "gotcha" shit, especially with finances. It bothers me enough that I even prioritize the comeuppances of assholes over optimizing my returns... on occasion.

thd7t

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Re: Is there a calculator that helps decide if PMI is worth it?
« Reply #48 on: June 11, 2015, 03:10:18 PM »
Conventional mortgages usually have a 24 month minimum term for PMI.  FHA it's usually 60 months or duration of the loan.  However, when we had an FHA loan, I don't think they were willing to remove MI until the loan was paid to 78% LTV.  We ended up taking the refi route.
Like I said, my main problem was expectation management. I made a pointed effort to get them to disclose ALL criteria. This was not discussed, and if it was in the closing package at all, it was buried somewhere in extremely fine print.
The absolute worst case here is about $500 over the next 16 months. Lately that's like 3 days worth of savings, so who cares, right? But I have a real, visceral reaction to this "gotcha" shit, especially with finances. It bothers me enough that I even prioritize the comeuppances of assholes over optimizing my returns... on occasion.
Well, your priorities aren't wrong.  You get to saving like that by optimizing, so your attitude is good (mad is good?).  If it makes you feel better (it won't), the time requirements are probably to protect the entire mortgage insurance system and not to be punitive.  Still, they should be disclosed clearly.