PMI $40 a month. Pay off or not?

[DBV1985]

Hi,

I know the answer is almost always yes but I don't think it makes much of a difference in my situation. I refinanced my home from 30 yr down to 15 yr a few months ago. Dropped my PMI from $120 a month to $40. Decreased interest rate from 4.0 to 2.75.
Currently my outstanding balance is $246K and I am 14K away from getting rid of the PMI. That is money I could invest instead and it could earn me more than $40/month of PMI. The PMI will fall off naturally next year when it does reach 20% loan to value. It totals to about $480 PMI expense for the next year. When deducted off my taxes it makes it closer to $400 total expense.

Would you pay it off now or just wait for it to expire next year?

Thanks!
J

[Ocinfo]

I wouldn't but it falls in the grey zone. Between the saved $400 in PMI and saved interest on the $14k that's a 5-6% return. Really need to verify that it would actually fall off immediately after you pay it down or if your loan requires an appraisal to remove early or has a minimum time before it can be removed.


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[Spork]

A side question that might tilt things:
Have you looked into the process of how PMI is removed?  Many years ago we paid up to 20% to ditch PMI and there were some fees involved.  I believe it effectively required us to pay for the bank's appraiser to reappraise the house to verify the 20%.  That was 15-20 years ago and I think we paid ~$300.  At the time it was worth it.  But if you had to pay a few hundred bucks, it might tilt this equation.

[looks like Ocinfo had the same ideas... we had a near post-collision]

[Heart of Tin]

How much money per month do you have to throw at either investment or the principle payoff? When do plan to either sell the house or otherwise access its equity? As asked above, is there a fee associated with early PMI removal?

When you pay down the principle on your mortgage to eliminate PMI, you do get the immediate return of eliminating the $40 expense every month. However, that extra money is then trapped in your mortgage at a 2.75% rate until either the end of the mortgage or until you sell the house or until you take a loan against your equity. The short term return (over the next year) of eliminating that $40 expense is relatively high, but as the years go by the overall return on the extra money you put into the principle payments falls sharply as it can only return the guaranteed 2.75% rate.

If you have a long time frame for your mortgage (over 5 years), then investing probably makes the most sense.

[DBV1985]

That was one of the key questions I asked while refinancing and when I was signing the final docs. No appraisal is needed to verify the home value. The banks are now required to remove the PMI automatically when it reaches loan to value 80/20%. This is a new law since the real estate fiasco in 2008. They did tell me to call the bank at that point and let them know they need to remove the PMI otherwise the process can take up to 2 months.
No fee for early PMI or mortgage payoff.

I didn't consider the amount of interest savings on my loan long term. I do plan on keeping the mortgage for 10+ years and do not want to access equity. I don't plan on paying the mortgage off early. It's early enough when I refinanced it from 30 year to 15 year. According to the amortization schedule my monthly interest would drop from $563 to $534 if I put in 14K.
It's starting to seem like I should get rid of the PMI.

J

[Heart of Tin]

Just the opposite, in my opinion. When you pump extra money into the mortgage you get the immediate $40/month return for the months that you would have paid PMI, but in the long term that extra money will be trapped in your mortgage/equity with a 2.75% long term return. It might have a higher return in the next 4 years, but since you won't be selling for at least 10 years, that's the term that we should consider. If you take all of that extra money and invest it instead, then you should see about a 4-7% return long term rather than 2.75%.

[Scortius]

That was one of the key questions I asked while refinancing and when I was signing the final docs. No appraisal is needed to verify the home value. The banks are now required to remove the PMI automatically when it reaches loan to value 80/20%. This is a new law since the real estate fiasco in 2008. They did tell me to call the bank at that point and let them know they need to remove the PMI otherwise the process can take up to 2 months.
No fee for early PMI or mortgage payoff.

Just a quick note, the current regulations require automatic removal at 78/22%, not 80/20.  You may want to double-check with your lender to make sure.  If you go for it at 20, I do think you need a bank's appraisal, but it may be free unless you want to appeal their (likely low) valuation.

Just reading the high-level details, I'd probably just invest the money instead.  You do get a higher rate of return for PMI payoffs than compared with your regular mortgage payoff, but that increased rate is fixed to last only as long as the time you'd have PMI without an early payoff.  If you put it into the market, you get a high rate of return forever.