Author Topic: New. I think tackling PMI is the best option for my extra $?  (Read 3110 times)

ETBen

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Hi All,

Does this make sense to others or am I not considering something?  Here's the story or skip down to the math.  :)

I'm recently separated, 2 kids.  Starting over from scratch after my ex ran up unbelievable debt, although we both have a very high income.  I am buying a house in a few weeks, FHA, 3.5% down.  I would rather put down more but timing isn't right and this house is.  Even with PMI, it works out better than renting.  Townhouse is condo ownership, everything inside is new, so no home maintenance issues upcoming. 

I will have about 1500 left over each month, after mortgage, debt, spending, and retirement savings.  Also bonuses along the way.  "Mortgage" is the total P&I, PMI, insurance, condo fee.

Debt:
- 12k student loans at 2ish%.  %200 per month
- 5k loan from 401k to get myself started out on my own.  $40 per month
- mortgage PMI is $200 per month.  B/c its FHA, PMI is the life of the loan.
- I carry none of the credit card debt he created.
 
- I have a small emergency savings. 
- no car payment.  I have a 2009 Prius that never needs more than routine maintenance.  150k miles, so maybe 3k for a battery if it goes kaput.


Thinking would be to invest b/c the long term returns are higher % than any of my debt %. 

HOWEVER, if PMI is for the life of an FHA loan, then it makes sense to refi as soon as possible to get that off?

My conclusion (maybe?):  I should sock everything into reaching 10-20% LTV to refi and get rid of PMI.  THEN begin investing my extra money. 

MDM

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Re: New. I think tackling PMI is the best option for my extra $?
« Reply #1 on: July 26, 2015, 02:38:48 PM »
ETBen, welcome to the forum.

Need to know the interest rates on all your options to give a decent response.

forummm

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Re: New. I think tackling PMI is the best option for my extra $?
« Reply #2 on: July 26, 2015, 02:44:06 PM »
And the dollar amount it would take to get you to 20% LTV.

Most likely refinancing quickly is the most profitable. But it depends.

ETBen

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Re: New. I think tackling PMI is the best option for my extra $?
« Reply #3 on: July 26, 2015, 02:53:21 PM »
oh forgot:

Mortgage currently is 4%.  I figure refi next summer will be somewhere at or under 5%, depending on where rates go. 

Remove PMI: need $21k to get to LTV (paying $200 per month)

Student loans: $12k at 2.2% (paying $200/month)

401K loan: $5k at 4%  (paying $40/month)

(I can realistically get to the $21k by next summer.)  I like the emotional feeling of having no student loans but the rate is low.  It's the same monthly payment as the PMI, but then the PMI never goes away. 

If I invest the extra money and wait until the home naturally hits the LTV to refi, then I think interest rates may be higher as to negate any gains.  But then I suck at this kind of math. 


forummm

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Re: New. I think tackling PMI is the best option for my extra $?
« Reply #4 on: July 26, 2015, 03:25:57 PM »
oh forgot:

Mortgage currently is 4%.  I figure refi next summer will be somewhere at or under 5%, depending on where rates go. 

Remove PMI: need $21k to get to LTV (paying $200 per month)

Student loans: $12k at 2.2% (paying $200/month)

401K loan: $5k at 4%  (paying $40/month)

(I can realistically get to the $21k by next summer.)  I like the emotional feeling of having no student loans but the rate is low.  It's the same monthly payment as the PMI, but then the PMI never goes away. 

If I invest the extra money and wait until the home naturally hits the LTV to refi, then I think interest rates may be higher as to negate any gains.  But then I suck at this kind of math. 

Assuming you can't get a conventional loan (i.e. you don't even have 5% to put down), I would put 100% of your extra cash into the mortgage for now. And at the same time try to qualify for a conventional loan with 5% down (and PMI) or 80% down with a piggyback loan (or home equity loan) for the balance. PMI is essentially a huge bump to your mortgage interest rate. And it gets bigger the more you pay down the loan. And ideally you'd like to lock in your 30-year fixed rate quickly (before interest rates go up much). And your student loan rate is small and tax deductible. I wouldn't pay it off early at all.

ETBen

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Re: New. I think tackling PMI is the best option for my extra $?
« Reply #5 on: July 26, 2015, 03:31:26 PM »
I'm close to having 5% and can qualify a conventional.  Basically this home came available a few months too early for me.  Otherwise i would rent for a year.  (and looked at 5 others for sale and would have rented for a year based on those.)

Maybe I should just push for the conventional.  Then I can ride out the PMI until it reaches LTV.  Although I think PMI is higher on a conventional than a FHA. 

forummm

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Re: New. I think tackling PMI is the best option for my extra $?
« Reply #6 on: July 26, 2015, 03:34:27 PM »
If I'm getting all your numbers right (27k is 16.5% of home value), your home value is around $130k. So $200/mo PMI is like an extra ~2% increase in your interest rate to start with, and it only increases each month as you pay down the mortgage.

I'm close to having 5% and can qualify a conventional.  Basically this home came available a few months too early for me.  Otherwise i would rent for a year.  (and looked at 5 others for sale and would have rented for a year based on those.)

Maybe I should just push for the conventional.  Then I can ride out the PMI until it reaches LTV.  Although I think PMI is higher on a conventional than a FHA. 

You could run the numbers and see if conventional is better given that you can avoid refinancing. Not only would you avoid the huge hassle and closing costs of refinancing (around $2k), but you would lock in an interest rate that is probably lower than what you can get next year.

MDM

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Re: New. I think tackling PMI is the best option for my extra $?
« Reply #7 on: July 26, 2015, 03:51:11 PM »
Mortgage currently is 4%.  I figure refi next summer will be somewhere at or under 5%, depending on where rates go. 

Remove PMI: need $21k to get to LTV (paying $200 per month)

Student loans: $12k at 2.2% (paying $200/month)

401K loan: $5k at 4%  (paying $40/month)

(I can realistically get to the $21k by next summer.)  I like the emotional feeling of having no student loans but the rate is low.  It's the same monthly payment as the PMI, but then the PMI never goes away. 

If I invest the extra money and wait until the home naturally hits the LTV to refi, then I think interest rates may be higher as to negate any gains.  But then I suck at this kind of math.

If $21K gets you 80% LTV, that means (V - 3.5%V - $21K) / V = 80%, so 16.5%V = $21K and V = $127,272, correct?

That means the loan principal is $122,818.  Financed at 4% over 30 years, that gives a monthly payment of $586.  Paying at that rate, it will take ~100 months to get the remaining principal down to 80% of $127,272 = $101,818.

Note: I recall a well done analysis of PMI done somewhere on this site (forummm, was that yours?).  It showed that the closer one gets to the 80% LTV, the better the return for getting rid of PMI.  Before I go further, two things:
1) ETBen, are the numbers here correct (or at least close enough)?
2) Anyone have a link to the PMI analysis post?


ETBen

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Re: New. I think tackling PMI is the best option for my extra $?
« Reply #8 on: July 26, 2015, 04:06:55 PM »
okay, I forgot a lot of info, sorry.

21k gets me to 90% LTV.  I would refinance next summer with 10% down and do prepaid PMI (slightly higher rate.)  Home is 334k.   

But now that I'm "talking" through it, it makes more sense to do 5% down conventional, with the slightly higher rate/prepaid PMI. 

Then I use my extra monthly $ to both invest and pay down the mortgage.  Goal is to have no mortgage at age 50 (15 yrs from now and my kids are out of college).  In that case, the slightly higher interest over the life of the mortgage won't be such a factor as if I let it go the full 30 yrs. 

forummm

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Re: New. I think tackling PMI is the best option for my extra $?
« Reply #9 on: July 26, 2015, 04:38:46 PM »
okay, I forgot a lot of info, sorry.

21k gets me to 90% LTV.  I would refinance next summer with 10% down and do prepaid PMI (slightly higher rate.)  Home is 334k.   

But now that I'm "talking" through it, it makes more sense to do 5% down conventional, with the slightly higher rate/prepaid PMI. 

Then I use my extra monthly $ to both invest and pay down the mortgage.  Goal is to have no mortgage at age 50 (15 yrs from now and my kids are out of college).  In that case, the slightly higher interest over the life of the mortgage won't be such a factor as if I let it go the full 30 yrs. 

I generally wouldn't invest excess cash until you've paid off the mortgage enough to get rid of PMI. You can give yourself a pretty high fixed (guaranteed) return on your money by paying down the mortgage to get rid of PMI. Any investment you make in the markets is not guaranteed. Can you get rid of it at 90%? If not, why is that $27k number important?

ETBen

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Re: New. I think tackling PMI is the best option for my extra $?
« Reply #10 on: July 26, 2015, 04:59:16 PM »
At 90% you can do "prepaid" PMI which is a slightly higher interest rate.  21K gets me to 90%.  But now I'm thinking it's better to do a conventional with 5% down and prepaid PMI.  It's less per month.  More over the life of the loan but I won't have it the full 30 years anyway. 
And now I remember why it was so much easier to buy with 20%.  If only I had married better lol. 


forummm

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Re: New. I think tackling PMI is the best option for my extra $?
« Reply #11 on: July 26, 2015, 05:37:39 PM »
At 90% you can do "prepaid" PMI which is a slightly higher interest rate.  21K gets me to 90%.  But now I'm thinking it's better to do a conventional with 5% down and prepaid PMI.  It's less per month.  More over the life of the loan but I won't have it the full 30 years anyway. 
And now I remember why it was so much easier to buy with 20%.  If only I had married better lol. 

It sounds like you should do some more sophisticated modeling here. There are too many variables that only you're aware of.

ETBen

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Re: New. I think tackling PMI is the best option for my extra $?
« Reply #12 on: July 29, 2015, 06:11:10 PM »
I have to update that I spoke with the mortgage broker and he was very helpful.  I kind assume they will all be slimeballs.  This is the third time I've bought a house (first two when married), so I know the basics.  He seemed like a respectful guy the first time I met with him. 

I gave him my plans long and short term, various options.  He actually worked out three different options for me the next day, short term cash flow and long term cost considerations.  Pointed out things that I hadn't considered. 

I mean, that's his job.  But it was definitely better service than I would expect and helped me make an informed decision.