Author Topic: Should I quickly pay down my mortgage to eliminate PMI?  (Read 4702 times)

Longwell

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Should I quickly pay down my mortgage to eliminate PMI?
« on: September 11, 2018, 11:57:56 AM »
I am trying to figure out if I should put down extra cash to get out of PMI or just eat the fees and invest the money instead. I tried figuring this out myself with an average return of 6% and to me it kind of looks like a wash or it leaning slightly to paying down the PMI as being the right decision but I want some input.

Current Mortgage Balance: $196,815
Balance needed to get rid of PMI: $173,120
Difference: $23,695

My PMI costs me $100 a month.
  • After taxes, interest, etc I am currently able to pay down the principal by $875 a month. This means that it will take me 27 months, with $2700 in extra PMI payments (wasted money)
  • I am considering putting down $1500 a month (plus whatever other money I get from sidegigs). This would take me roughly 12-15 months or only $1200-1500 in PMI payments, eliminating around $1500 in PMI payments from the first option

So do I try to pay down the PMI as aggressively as possible and then switch over to investing? Or do I keep the course and just pay it down the way I have been while investing the rest? Thanks for any help in advance!

nedwin

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #1 on: September 12, 2018, 09:43:13 AM »
Are you able to eliminate PMI based on appreciation without paying down the mortgage balance?  I was able to eliminate PMI because of appreciation,  I only had to pay for new appraisal ($400?).

terrifictim

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #2 on: September 12, 2018, 10:49:20 AM »
I second the advice of nedwin. My fiancee was in a similar type situation- would have needed to put ~$15,000 in principal down in order to remove the PMI. Instead we got it reappraised and were able to get the PMI removed for the appraisal fee of $425. The two conditions for this process for our lender was: no late payments, needed to be in the property for a minimum of two years. It's worth asking your vendor if you qualify to remove the PMI with a reappraisal. Also - this also assumes that your property has appraised enough to hit the 80% LTV.

Dicey

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #3 on: September 15, 2018, 10:52:49 AM »
If PMI is the only way you could have gotten in to this property, then just embrace it and be glad it was available to you. Everybody with less than 20% down is happy to get a loan with PMI, and then they promptly despise it.

You can increase the value of your home by making wise DIY improvements, and by just plain waiting for the housing market to improve. Given enough time, PMI cures itself even if you do nothing. Not a terrible deal.

Typically, it's better to invest your surplus into the stock market than your mortgage, if it's just for the purpose of killing PMI. For more on this subject, check out this thread:

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

Longwell

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #4 on: October 02, 2018, 07:30:17 AM »
I second the advice of nedwin. My fiancee was in a similar type situation- would have needed to put ~$15,000 in principal down in order to remove the PMI. Instead we got it reappraised and were able to get the PMI removed for the appraisal fee of $425. The two conditions for this process for our lender was: no late payments, needed to be in the property for a minimum of two years. It's worth asking your vendor if you qualify to remove the PMI with a reappraisal. Also - this also assumes that your property has appraised enough to hit the 80% LTV.

This sounds like a great idea. My only concern is could the reassessment possibly raise my taxes?

EDIT: So I just called Wells Fargo and they said that there is no way to get PMI removed unless you have 20% equity in the house. So it sounds like perhaps this isn't an option for me.
« Last Edit: October 02, 2018, 07:52:10 AM by Longwell »

nedwin

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #5 on: October 02, 2018, 09:40:33 AM »
What type of loan do you have?  FHA?  Conventional?  The answer will have an impact on how (and if) you can eliminate PMI early.

Did you ask Wells Fargo if you could establish 20% equity by having your home re-appraised?

A new appraisal should not have an affect on your property taxes, as they are generally not reported to the local tax assessor.

Longwell

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #6 on: October 02, 2018, 11:57:41 AM »
What type of loan do you have?  FHA?  Conventional?  The answer will have an impact on how (and if) you can eliminate PMI early.

Did you ask Wells Fargo if you could establish 20% equity by having your home re-appraised?

A new appraisal should not have an affect on your property taxes, as they are generally not reported to the local tax assessor.

I just have a standard 30 year mortgage.

That was the exact question I asked them, if it was possible for PMI to be removed by having my home re-appraised. I guess it's possible that I didn't explain what I was asking properly or the person just didn't know.

Treeclimber65

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #7 on: October 03, 2018, 03:00:49 AM »
I'm think you should call Wells Fargo back.  I just did exactly this with my Wells Fargo mortgage in June.  Had it re-appraised based on increased value and had the PMI removed.  Wells Fargo even offered me a special program and I did not have to pay for a full priced appraisal.  Instead, a real estate agent did it and it only cost me $200.00.

terrifictim

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #8 on: October 03, 2018, 08:08:59 AM »
Just did a quick google search (https://www.wellsfargo.com/mortgage/manage-account/insurance/mortgage-insurance/how-to-remove-mortgage-insurance/).

------------------------------
Quote
Canceling PMI
For loans covered by the Homeowners Protection Act of 1998 (HPA), you can request to have PMI removed when your balance reaches 80% loan-to-value (LTV) based on the original value of your home. If you're requesting to have PMI removed, you:

Have to get a home value assessment through Wells Fargo (at your own expense) to confirm your home's value hasn't declined since closing
Must not have had any 30-day late payments within the past 12 months
Must not have had any 60-day late payments within the last 24 months
Otherwise, we'll automatically cancel it when your balance reaches 78% LTV if you're up to date on your payments.

If your home's value went up since closing, you may be able to cancel your PMI earlier, based on its current value. In some cases this can happen if you've made significant improvements to your home. You'll need to get a home value assessment to confirm its value. The guidelines don't apply to every loan so be sure to call us at 1-800-357-6675 to get the specifics on when you can remove your PMI. See our FAQs to learn more.

TexasRunner

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #9 on: October 08, 2018, 12:45:13 PM »
$23,695.00 if invested would net $1,850.00 annually in the market, or about $157.00 each month.  (Assuming 8% growth for simplicity, and ignoring exponential gains).

While PMI is annoying, you are at a loss the instant you pay extra.  Significantly more so once you account for 30-Year opportunity loss, compound gains, and the variable of interest rate vs market rate on the funds.

If you can do it for the price of an appraisal (~$400), knock yourself out.  Otherwise, you have to get to 78% LTV which will cost you money you can never get back.

The math says no.

Longwell

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #10 on: October 09, 2018, 09:51:31 AM »
I'm think you should call Wells Fargo back.  I just did exactly this with my Wells Fargo mortgage in June.  Had it re-appraised based on increased value and had the PMI removed.  Wells Fargo even offered me a special program and I did not have to pay for a full priced appraisal.  Instead, a real estate agent did it and it only cost me $200.00.

Did you do significant renovations to your home or was it just an increase of your house value in the market? Like supposedly according to Redfin my house is worth $60K more than I paid for it, but obviously who know's how accurate that is.

thd7t

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #11 on: October 09, 2018, 10:26:44 AM »
$23,695.00 if invested would net $1,850.00 annually in the market, or about $157.00 each month.  (Assuming 8% growth for simplicity, and ignoring exponential gains).

While PMI is annoying, you are at a loss the instant you pay extra.  Significantly more so once you account for 30-Year opportunity loss, compound gains, and the variable of interest rate vs market rate on the funds.

If you can do it for the price of an appraisal (~$400), knock yourself out.  Otherwise, you have to get to 78% LTV which will cost you money you can never get back.

The math says no.
The math says yes.  The pmi is costing $1200/year and the interest on the portion of the loan that carries pmi ($23,695) is $710 @ 3% interest.  At 3% interest on the loan, paying off PMI beats 8% returns.

PMI can't be treated like interest added to the cost of the whole loan.  It's only applied to the top 20%.

TexasRunner

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #12 on: October 09, 2018, 11:16:28 AM »
$23,695.00 if invested would net $1,850.00 annually in the market, or about $157.00 each month.  (Assuming 8% growth for simplicity, and ignoring exponential gains).

While PMI is annoying, you are at a loss the instant you pay extra.  Significantly more so once you account for 30-Year opportunity loss, compound gains, and the variable of interest rate vs market rate on the funds.

If you can do it for the price of an appraisal (~$400), knock yourself out.  Otherwise, you have to get to 78% LTV which will cost you money you can never get back.

The math says no.
The math says yes.  The pmi is costing $1200/year and the interest on the portion of the loan that carries pmi ($23,695) is $710 @ 3% interest.  At 3% interest on the loan, paying off PMI beats 8% returns.

PMI can't be treated like interest added to the cost of the whole loan.  It's only applied to the top 20%.

Correct....  However any early payments made now must be carried through the life of the loan.  The lost opportunity cost will remain for 30 years (or whatever slightly shorter remaining loan time is applied) as well as indefinitely into the future due to lost time to compound things.

Thats why not paying it off wins long term, because operating on margin the gains are that big compared to spending PMI.

The actual gains including compounding on only the 23k above is 261,125.49 for 30 years.
The gains from paying off the mortgage to reduce pmi on 23k at 3% is 58,214.88 PLUS 100$ a month for approx. 101 payments (unsure original as OP hasn't provide full loan data) is an additional $10,100.00 for a TOTAL OF $68,314.88 in savings.

Lost Opportunity of $261,125.49
is greater than
Savings of $68,314.88


Paying off a 3% fixed 30-year loan early, even to remove PMI, does not make financial sense....
In this case it makes $192,810.61 worth less sense....

@Longwell , I hope your paying attention.  I was in your shoes.

thd7t

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #13 on: October 09, 2018, 11:28:36 AM »
TexasRunner, nice analysis.  Wouldn't you want to assume that the $100/month would be invested, though?  Over 30 years, that returns $136,000 in addition to the $68,000.  That brings us to $204,000. 

Still not as good, but we don't know OP's mortgage rate and I skewed the number lower than a new 30 year mortgage could possibly be.

TexasRunner

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #14 on: October 09, 2018, 11:34:30 AM »
TexasRunner, nice analysis.  Wouldn't you want to assume that the $100/month would be invested, though?  Over 30 years, that returns $136,000 in addition to the $68,000.  That brings us to $204,000. 

Still not as good, but we don't know OP's mortgage rate and I skewed the number lower than a new 30 year mortgage could possibly be.

You are correct, but (similar to my first post) I try to simplify and stay out of the weeds.  While it does increase the gains from holding the mortgage, you can lose viewers of the forest due to the trees.

We also should account for inflation (taking my 8% to a lofty 10%) as well as investing the PMI 100$ per month (which would reduce some things, but nowhere near the level of a 4% fixed margin), also tax benefits from mortgage interest, and risk of eviction (banker has to evict one of two people, same value house in the same area, one owes 300k and the other owes 150k, who do you think he will pick in a down market...?) etc.  Essentially, KISS to prove the point since all the smaller factors will only adjust the end result, not change it.
« Last Edit: October 09, 2018, 11:36:04 AM by TexasRunner »

thd7t

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #15 on: October 09, 2018, 11:41:22 AM »
TexasRunner, nice analysis.  Wouldn't you want to assume that the $100/month would be invested, though?  Over 30 years, that returns $136,000 in addition to the $68,000.  That brings us to $204,000. 

Still not as good, but we don't know OP's mortgage rate and I skewed the number lower than a new 30 year mortgage could possibly be.

You are correct, but (similar to my first post) I try to simplify and stay out of the weeds.  While it does increase the gains from holding the mortgage, you can lose viewers of the forest due to the trees.

We also should account for inflation (taking my 8% to a lofty 10%) as well as investing the PMI 100$ per month (which would reduce some things, but nowhere near the level of a 4% fixed margin), also tax benefits from mortgage interest, and risk of eviction (banker has to evict one of two people, same value house in the same area, one owes 300k and the other owes 150k, who do you think he will pick in a down market...?) etc.  Essentially, KISS to prove the point since all the smaller factors will only adjust the end result, not change it.
I agree that we shouldn't get too into the details, but not comparatively investing dramatically skewed the results in an unrealistic way and it ignored OP's question about when to invest.  With the math relatively close (Not nearly $200k different), they should input their real numbers and find a real answer, now.

FIPurpose

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #16 on: October 09, 2018, 12:00:11 PM »
$23,695.00 if invested would net $1,850.00 annually in the market, or about $157.00 each month.  (Assuming 8% growth for simplicity, and ignoring exponential gains).

While PMI is annoying, you are at a loss the instant you pay extra.  Significantly more so once you account for 30-Year opportunity loss, compound gains, and the variable of interest rate vs market rate on the funds.

If you can do it for the price of an appraisal (~$400), knock yourself out.  Otherwise, you have to get to 78% LTV which will cost you money you can never get back.

The math says no.
The math says yes.  The pmi is costing $1200/year and the interest on the portion of the loan that carries pmi ($23,695) is $710 @ 3% interest.  At 3% interest on the loan, paying off PMI beats 8% returns.

PMI can't be treated like interest added to the cost of the whole loan.  It's only applied to the top 20%.

Correct....  However any early payments made now must be carried through the life of the loan.  The lost opportunity cost will remain for 30 years (or whatever slightly shorter remaining loan time is applied) as well as indefinitely into the future due to lost time to compound things.

Thats why not paying it off wins long term, because operating on margin the gains are that big compared to spending PMI.

The actual gains including compounding on only the 23k above is 261,125.49 for 30 years.
The gains from paying off the mortgage to reduce pmi on 23k at 3% is 58,214.88 PLUS 100$ a month for approx. 101 payments (unsure original as OP hasn't provide full loan data) is an additional $10,100.00 for a TOTAL OF $68,314.88 in savings.

Lost Opportunity of $261,125.49
is greater than
Savings of $68,314.88


Paying off a 3% fixed 30-year loan early, even to remove PMI, does not make financial sense....
In this case it makes $192,810.61 worth less sense....

@Longwell , I hope your paying attention.  I was in your shoes.

I think your analysis is off; I don't see where you add in the opportunity cost for the saved PMI. As in, you compound the 23k over 30 years, but didn't compound the PMI savings

It looks like you're using a 12% stock return which is probably a bit much, but even so the saved $10,000 in PMI will negate about $115k of your estimate.

23k in stock  compounded @10% = 177k

Interest savings (your number) = 58k
PMI savings + opportunity cost = 10k + 77k

177k - 145k = 32k

Over 30 years, there isn't a huge difference, but the closer you get to paying down to 80%, the better it's going to look since it's a flat payment.

TexasRunner

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #17 on: October 09, 2018, 03:45:20 PM »
$23,695.00 if invested would net $1,850.00 annually in the market, or about $157.00 each month.  (Assuming 8% growth for simplicity, and ignoring exponential gains).

While PMI is annoying, you are at a loss the instant you pay extra.  Significantly more so once you account for 30-Year opportunity loss, compound gains, and the variable of interest rate vs market rate on the funds.

If you can do it for the price of an appraisal (~$400), knock yourself out.  Otherwise, you have to get to 78% LTV which will cost you money you can never get back.

The math says no.
The math says yes.  The pmi is costing $1200/year and the interest on the portion of the loan that carries pmi ($23,695) is $710 @ 3% interest.  At 3% interest on the loan, paying off PMI beats 8% returns.

PMI can't be treated like interest added to the cost of the whole loan.  It's only applied to the top 20%.

Correct....  However any early payments made now must be carried through the life of the loan.  The lost opportunity cost will remain for 30 years (or whatever slightly shorter remaining loan time is applied) as well as indefinitely into the future due to lost time to compound things.

Thats why not paying it off wins long term, because operating on margin the gains are that big compared to spending PMI.

The actual gains including compounding on only the 23k above is 261,125.49 for 30 years.
The gains from paying off the mortgage to reduce pmi on 23k at 3% is 58,214.88 PLUS 100$ a month for approx. 101 payments (unsure original as OP hasn't provide full loan data) is an additional $10,100.00 for a TOTAL OF $68,314.88 in savings.

Lost Opportunity of $261,125.49
is greater than
Savings of $68,314.88


Paying off a 3% fixed 30-year loan early, even to remove PMI, does not make financial sense....
In this case it makes $192,810.61 worth less sense....

@Longwell , I hope your paying attention.  I was in your shoes.

I think your analysis is off; I don't see where you add in the opportunity cost for the saved PMI. As in, you compound the 23k over 30 years, but didn't compound the PMI savings

It looks like you're using a 12% stock return which is probably a bit much, but even so the saved $10,000 in PMI will negate about $115k of your estimate.

23k in stock  compounded @10% = 177k

Interest savings (your number) = 58k
PMI savings + opportunity cost = 10k + 77k

177k - 145k = 32k

Over 30 years, there isn't a huge difference, but the closer you get to paying down to 80%, the better it's going to look since it's a flat payment.

You are right.  The 'smallness' of the loan and the investment opportunity to make things get closer together than normal.  I was using 8% return on stocks.
If we account for inflation as well, the numbers turn out as follows:


The actual gains including compounding on only the 23k above is 261,125.49 for 30 years. (at 8% annual rate).

The gains from paying off the mortgage to reduce pmi on 23k at 3% is 58,214.88 PLUS 100$ a month for approx. 101 payments (unsure original as OP hasn't provide full loan data) is an additional $10,100.00.  However, saving $10,100 isn't small potatoes and the PMI not paid (gains because it wasn't paid) invested for 30 years at 8% will net $80,189.53 at the end of 30 years.  However, you will lose 12,900 in payments that would have been inflation delayed across 360 months, at a average inflation rate of 3.22%, which is another net loss of 20,992.19 (33,892.19 - initial 'principal' of 12,900 un-inflated dollars) that could have been paid with future dollars but wasn't.  I am excluding 'savings' from not 'spending' PMI out of that number, or else it would have been higher. 

Lost Opportunity of $261,125.49
is greater than
Savings of $117,412.22 ($58,214.88 + 80,189.53 - 20,992.19)
<$143,713.27 NET LOSS>

If you don't care about inflation, then its:
Lost Opportunity of $261,125.49
is greater than
Savings of $138,404.41 ($58,214.88 + 80,189.53)
<$122,721.08 NET LOSS>

So you will lose $143,713.27 across 30 years if you prepay or, alternatively, if you want to plug your fingers in your ears and ignore inflation, you can lose $122,721.08 across 30 years.

Thats (nearly) enough to put a kid through college.
Almost enough to buy another house in cash.
Buy a couple of Tesla Model S for retirement...

Pretending that it a large sum of money, and that 'you can just work for another year to make up for it' is really terrible financial planning.  Especially on a FIRE forum.

FIPurpose

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #18 on: October 09, 2018, 04:25:24 PM »
I think you have one more adjustment to make.

You're using pre-tax dollars in your investment comparison. You'll need to estimate at least some of that money has to go to taxes in both capital gains and in your compounding estimates.

If he's debating between paying off PMI or contributing to his 401k the the answer is obviously 401k.

Treeclimber65

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #19 on: October 10, 2018, 04:37:22 AM »
Did you do significant renovations to your home or was it just an increase of your house value in the market? Like supposedly according to Redfin my house is worth $60K more than I paid for it, but obviously who know's how accurate that is.

This is a relatively new property so no renovations. I had it reappraised based on increased value. Zillow had it valued at an amount that brought it above 20 percent equity. I was lucky in a way because it is a townhouse and two essentially identical townhouses had sold for Zillow's valuation, so I thought it was worth the risk. Wells Fargo offering to do the appraisal for $200 didn't hurt. In our case, Zillow's value was right on the money, but of course that can vary widely from home to home. 

TexasRunner

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #20 on: October 10, 2018, 09:36:06 AM »
Did you do significant renovations to your home or was it just an increase of your house value in the market? Like supposedly according to Redfin my house is worth $60K more than I paid for it, but obviously who know's how accurate that is.

This is a relatively new property so no renovations. I had it reappraised based on increased value. Zillow had it valued at an amount that brought it above 20 percent equity. I was lucky in a way because it is a townhouse and two essentially identical townhouses had sold for Zillow's valuation, so I thought it was worth the risk. Wells Fargo offering to do the appraisal for $200 didn't hurt. In our case, Zillow's value was right on the money, but of course that can vary widely from home to home.

Congrats on getting rid of your pmi.  Re-appraisal definitely seems like the way to go.  I am glad OP started this thread, because it reminded me I need to have the house re-appraised to get rid of PMI as well.  Pay off app vs PMI is about 3 months for me, then its profit.

TexasRunner

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #21 on: October 10, 2018, 09:38:22 AM »
I think you have one more adjustment to make.

You're using pre-tax dollars in your investment comparison. You'll need to estimate at least some of that money has to go to taxes in both capital gains and in your compounding estimates.

If he's debating between paying off PMI or contributing to his 401k the the answer is obviously 401k.

Ok, so slice the compounding by a maximum of 15% of the gains and your still thousands of dollars ahead by not paying it down...

Treeclimber65

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #22 on: October 12, 2018, 03:45:10 AM »
Congrats on getting rid of your pmi.  Re-appraisal definitely seems like the way to go.  I am glad OP started this thread, because it reminded me I need to have the house re-appraised to get rid of PMI as well.  Pay off app vs PMI is about 3 months for me, then its profit.

Sooner the better!  I realized after the fact that I could have done this at least a year and probably 18 months sooner.  That's quite a few dollars I wasted.

genesismachine

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #23 on: October 19, 2018, 04:30:59 PM »
The PMI/interest likely won't be tax deductible due to the recent Trump boosting of the standard deduction, but there will be capital gains tax on future stock appreciation from investing elsewhere. This causes the numbers to likely be a wash, or at least very close.

But the return on this is risk-free, while the return on other investments is not. If you're ever given the choice between a 10% guaranteed return vs a 10% *average* risky return, investment theory says you should always pick the guaranteed return. This is why risk premiums exist. You are not being compensated for your added risk in this case with higher average expected returns.

Further, you will be gaining another $100/month in free cash flow, which will add to your optionality in case you see other investment opportunities (although it is so small it probably won't add much). One thing you could do with the extra $100/month is to put it into a 401k.

TexasRunner

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #24 on: October 19, 2018, 05:49:06 PM »
The PMI/interest likely won't be tax deductible due to the recent Trump boosting of the standard deduction, but there will be capital gains tax on future stock appreciation from investing elsewhere. This causes the numbers to likely be a wash, or at least very close.

Nope nope nope nope no nope no.  The Mortgage deduction for interest is only <EFFECTIVE RATE> x Interest Paid.  He would still be paying interest and in the (very unlikely) event that he gets to itemize, there is still some interest to put on there, but it is minimal.  The Tax on gains however is only on Taxable Gains (IE DIVIDENDS) at 15%, again a very small amount.  With 8000k, As of December 2017, the dividend yield for the S&P 500 was 1.85%, that leads to $22.20 in additional taxes.  (8000 x 1.85% x 15% tax rate).  IT IS A TINY AMOUNT.  Giving up compounding on investments for 22$ in 'tax gains' because you chose not to invest is asinine. It is nowhere near a wash, as noted above.  @genesismachine please do the math and understand what is given up by pre-paying before giving advice. This is exactly why the DPOYM Club exists, because #fakemath calling things a wash leads people astray.

But the return on this is risk-free, while the return on other investments is not. If you're ever given the choice between a 10% guaranteed return vs a 10% *average* risky return, investment theory says you should always pick the guaranteed return. This is why risk premiums exist. You are not being compensated for your added risk in this case with higher average expected returns.

Again, not a 10% gain.  If it were we would all be telling him to pay it off as fast as possible (or better yet re-mortgage for a better rate) because the math doesn't make sense at 10% to keep the mortgage.  It does, however, make sense at 3%.  Again, saying that paying down the mortgage is a guaranteed 10% is #fakemath and leads people astray.

Further, you will be gaining another $100/month in free cash flow, which will add to your optionality in case you see other investment opportunities (although it is so small it probably won't add much). One thing you could do with the extra $100/month is to put it into a 401k.

If he isn't (and if you aren't) maxing out your 401k BEFORE paying any extra on a long-term low fixed rate loan, you are WASTING MONEY left and right.  Tax free depositing and gains in a 401k will ABSOLUTELY DEMOLISH the so-called 'return' on a mortgage.  At a bare minimum, fill up your tax-free buckets before paying any extra on a low rate loan. 

Beyond that, the extra 100$ obviously doesn't matter if he has extra thousands of dollars to get rid of PMI.  The little green soldiers need to be used the most effectively we can, not Russia WWII style marching them by the thousands into battle without rifles to get rid of a secure low-rate loan that can't be called while Moscow burns ...  (Little green soldiers is money, battle is PMI and loan extra payments, Moscow is tax free accounts ;) )

In all seriousness, this forum is supposed to be about optimizing and reducing consumption.  There is nothing optimal about paying down a mortgage early while leaving space (that is lost FOREVER) in a 401k...

genesismachine

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #25 on: October 19, 2018, 11:17:25 PM »
The PMI/interest likely won't be tax deductible due to the recent Trump boosting of the standard deduction, but there will be capital gains tax on future stock appreciation from investing elsewhere. This causes the numbers to likely be a wash, or at least very close.

Nope nope nope nope no nope no.  The Mortgage deduction for interest is only <EFFECTIVE RATE> x Interest Paid.  He would still be paying interest and in the (very unlikely) event that he gets to itemize, there is still some interest to put on there, but it is minimal.  The Tax on gains however is only on Taxable Gains (IE DIVIDENDS) at 15%, again a very small amount.  With 8000k, As of December 2017, the dividend yield for the S&P 500 was 1.85%, that leads to $22.20 in additional taxes.  (8000 x 1.85% x 15% tax rate).  IT IS A TINY AMOUNT.  Giving up compounding on investments for 22$ in 'tax gains' because you chose not to invest is asinine. It is nowhere near a wash, as noted above.  @genesismachine please do the math and understand what is given up by pre-paying before giving advice. This is exactly why the DPOYM Club exists, because #fakemath calling things a wash leads people astray.

But the return on this is risk-free, while the return on other investments is not. If you're ever given the choice between a 10% guaranteed return vs a 10% *average* risky return, investment theory says you should always pick the guaranteed return. This is why risk premiums exist. You are not being compensated for your added risk in this case with higher average expected returns.

Again, not a 10% gain.  If it were we would all be telling him to pay it off as fast as possible (or better yet re-mortgage for a better rate) because the math doesn't make sense at 10% to keep the mortgage.  It does, however, make sense at 3%.  Again, saying that paying down the mortgage is a guaranteed 10% is #fakemath and leads people astray.

Further, you will be gaining another $100/month in free cash flow, which will add to your optionality in case you see other investment opportunities (although it is so small it probably won't add much). One thing you could do with the extra $100/month is to put it into a 401k.

If he isn't (and if you aren't) maxing out your 401k BEFORE paying any extra on a long-term low fixed rate loan, you are WASTING MONEY left and right.  Tax free depositing and gains in a 401k will ABSOLUTELY DEMOLISH the so-called 'return' on a mortgage.  At a bare minimum, fill up your tax-free buckets before paying any extra on a low rate loan. 

Beyond that, the extra 100$ obviously doesn't matter if he has extra thousands of dollars to get rid of PMI.  The little green soldiers need to be used the most effectively we can, not Russia WWII style marching them by the thousands into battle without rifles to get rid of a secure low-rate loan that can't be called while Moscow burns ...  (Little green soldiers is money, battle is PMI and loan extra payments, Moscow is tax free accounts ;) )

In all seriousness, this forum is supposed to be about optimizing and reducing consumption.  There is nothing optimal about paying down a mortgage early while leaving space (that is lost FOREVER) in a 401k...

Ok, let's do some math.

The standard deduction for 2018 is $24k for married couples. With the numbers provided, it is highly unlikely that any part of the interest/mortgage insurance will be tax deductible for OP.

Rough numbers: $25k @ 3% interest + $100/month avoided = $1950/yr saved, ~7.8% risk free return

Now, that does seem under the long term stock market AVERAGE return. Forget about the tax on dividends because that's a tiny amount like you said. Eventually, you will be withdrawing the amount, right? In my state, I would be dealing with 15% federal tax rate + 10% state tax rate. Not sure about OP.

So to make $1950/yr from a $25k investment AFTER TAX, with a 25% rate, we would actually need to earn a 10.4% return RISK FREE if we were to compare apples to apples against a pure S&P 500 investment.

Now, let's take on the actual S&P 500 with dividend reinvestment over the last 50 years as a baseline:
https://dqydj.com/sp-500-return-calculator/

I got 10.02% return with dividend reinvestment from 1968-2018, which I think is a good baseline.

Now, would you rather have a 10.4% risk free return or a 10.02% risky return? It seems you may not understand how investment theory works if you think the second option is better.

But actually, it gets even worse for your point when you take into account that you could take that $1950/yr and invest it in the S&P 500 too. Using this compound interest calculator, and entering the following:
http://moneychimp.com/calculator/compound_interest_calculator.htm
Initial principal: $0
Years to grow: 10
Interest Rate (S&P 500 historical 50 year return including dividend reinvestment): 10.02%
Future Value: $34,224 ($59224 when you include the initial $25k)

Calculate the compound return: $(59224/25000)^(1/10) = 9% return

When accounting for tax rates, it gets a little more complicated since some (the stock market gains) is taxable while some (the interest/mortgage insurance avoided) isn't. This takes it to an 'adjusted' after tax return of 8.3%

Comparing apples to apples, that would mean the pure S&P 500 investment would have to return 11.08% RISK FREE. This is significantly above the 10.02% average return. And again, one is RISK FREE while the other is not. There is a concept called risk premium that says that you should be taking a smaller return in exchange for less risk/volatility. So if you believe in basic investment theory, you would need to have a return far in excess of 10.02% to compensate you for that risk, and that is unlikely to happen based on the past 50 years history.

So I would actually say that my math is just fine, and these numbers agree with what I posted earlier.

Now, paying off the remainder of the mortgage is a much more controversial move... I am by no means a proponent of paying off a 3% mortgage.

Disclaimer: Technically you would've eventually paid off the mortgage principal enough to get rid of PMI automatically at some point. I just used 10 years as a rough number for default payoff time. I admit I did simplify some of the math, not accounting for the wide range of possibilities (we could've had much more than 10.02% S&P 500 returns, or much less, thus the volatility). The numbers may change slightly depending on state tax rates and exact personal circumstances, and future tax rates (capital gains tax rates have changed many times throughout US history), but the general point holds in almost all imaginable circumstances.

TexasRunner

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #26 on: October 20, 2018, 10:45:20 AM »
Except you can't back out extra payments, so you need to be considering the remaining term on the loan - an additional 28 Years.

OP is likely not in the 25% tax bracket (again, see higher standard deduction). Much more likely he is in the 12% or 22% bracket (married filing jointly), and you need to use effective tax rate, not nominal.  Also note:  If he isn't maxing out 401k for him and his spouse, and maxing out ROTHs then there are additional TAX FREE dollars there.  So in those instances not only would taxes not apply, they would reduce his tax burden.

Also, you are not accounting for inflation.  S&P numbers include inflation, the mortgage does not.

Feel free to read the whole thread or revise your numbers.

genesismachine

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #27 on: October 20, 2018, 03:09:13 PM »
Except you can't back out extra payments, so you need to be considering the remaining term on the loan - an additional 28 Years.

OP is likely not in the 25% tax bracket (again, see higher standard deduction). Much more likely he is in the 12% or 22% bracket (married filing jointly), and you need to use effective tax rate, not nominal.  Also note:  If he isn't maxing out 401k for him and his spouse, and maxing out ROTHs then there are additional TAX FREE dollars there.  So in those instances not only would taxes not apply, they would reduce his tax burden.

Also, you are not accounting for inflation.  S&P numbers include inflation, the mortgage does not.

Feel free to read the whole thread or revise your numbers.

If you went to the link I provided, you'd see the S&P 500 numbers I provided are not factoring inflation. If you factor inflation with dividends reinvested, it drops the annual return to 5.78%, not the 10.02% I quoted.

I would actually argue that you would have to use nominal tax rates since this is adding on top of whatever he has already saved. Personally when I am trying to calculate the effect of an additional choice (on top of what I'm already doing), I use the nominal rate (the rate for tax on top of what I'm already doing), I would not average it in. But this is debatable depending on how you frame it.

You might be confusing long term capital gains tax rates with rates on earned income. There is no 12% or 22% tax bracket for long term capital gains. The rates are 0%, 15% and 20%. His personal income tax rate doesn't enter into this conversation (due to high standard deduction), and later he will be paying long term capital gains tax, not income tax.

But those are just details. What you're essentially saying is that 'risk premium' should not exist. If the long term return of the S&P 500 is 10%, then by that logic, all bonds should be returning 10% on the dot. This is very much in the face of virtually all investment knowledge. If we assume US government bonds to be as close to risk free as is possible, we see that 30 year bond notes are currently trading at 3.38% yield. Nowhere near 10%. This implies a 30 year risk premium of 6.62%, not 0%. One could argue that 6.62% may be too much or too little depending on the exact scenario, but I don't think anyone would argue it should be 0%. It's hard to overstate how much of an outsider opinion that is.

I feel like this is a religion and no amount of evidence will suffice...
« Last Edit: October 20, 2018, 03:23:31 PM by genesismachine »

ReadySetMillionaire

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #28 on: December 18, 2018, 10:30:42 AM »
I've run into a decent amount of cash at the end of this year.  I've generally determined that my tax bracket is so low (12% federal and 0% state due to being self-employed) and have come to a general consensus that it's time to pay off debt or invest in after tax accounts.  On that note, I Googled this thread to look into possibly paying off my mortgage to the 80% threshold to get rid of PMI.

Purchase Price: $127,500
Mortgage: $121,500 (30 years at 4.5% interest)
Current Balance: $112,000

I pay about $65/month towards PMI, and I have 51 months to go before I get to the 80% threshold. I contacted my loan officer regarding getting a re-appraisal, but my house would have to appraise at $149,000 for that to work out (as of my current balance), and I just can't see my house being appraised for that much just three years after purchase.

I find the discussion between @genesismachine and @TexasRunner to be quite fascinating and informative.  Some questions for both:

Genesis Machine -- how do I calculate my real rate of return if I paid my loan down to 80% loan to value? I think I'd have to pay a lump sum of about $10,000, and that will remove $65/month for 51 months, saving $3,315 in PMI.  I generally like the idea of doing this because it's a debt payment that actually reduces my monthly expenses, thus freeing up future capital. However, I'm having a hard time conceptualizing and/or calculating what the rate of return is on this.

Texas Runner -- You are making an incredibly compelling argument on a much higher value loan, but does your analysis change given my very low tax bracket?

Thanks to both of your for the insight.

TexasRunner

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #29 on: December 18, 2018, 11:34:17 AM »
Texas Runner -- You are making an incredibly compelling argument on a much higher value loan, but does your analysis change given my very low tax bracket?

You tax bracket actually doesn't come into the equation unless you have not yet maxed out all tax-free investment opportunities listed above.  If you haven't maxed out your tax free buckets, that 4.5% to 6.5% margin split noted above (your 4.5% loan vs a 9% to 11% average return) increases by an extra 12%, and then some.  Once you lose tax-free bucket "space" by running out of time, you can't get it back. 

Also understand, the timeline isn't just the next 50 months worth of PMI, it is your entire investing timeline.  At a minimum you need to look at the life of the loan, but in reality it is much longer.  If you had a million dollars and 4.5% rate of return on Investment A or 9.5% rate of return on Investment B, but you had to invest a certain minimum in "A", no one would choose A only over B, you would weigh the perceived risks of one vs another and come to a conclusion on whether the higher rate is worth it. 

Considering there is extremely little risk when looking at the market across a 30 year timeline, and there is no risk to holding (or paying off) a US based non-callable fixed rate mortgage, then it only makes sense to go for the best rate (as the risks are both comparably low). 

Long story short, no, I normally wouldn't pay extra to remove PMI on a 4.5% mortgage because those funds are 'sunk' into the mortgage.

HOWEVER - (And this is a big however), you state that you are paying $65 a month in PMI but would only need to remove $10,000 lump sum to get rid of those payments. That comes out to a 7.8% return on PMI for a 10k investment.  Add that on to the overall 4.5% rate and you are sitting at a 12.3% return for 51 months and then a 4.5% return for (presumably about) 280 months thereafter gets you a 5.7% total return for the full life of the loan (I would need your total remaining payments to be more accurate) which isn't bad but still doesn't touch S&P500's 9.8%.  That brings the math closer but once you account for inflation (you get to pay that 51st PMI payment in inflation reduced dollars), as well as tax gains from filling up your tax bucket (growth is tax-free too, not just your initial deposit) you would be much better off investing.

Check2400

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #30 on: December 18, 2018, 12:22:57 PM »
First let's understand this comment:
EDIT: So I just called Wells Fargo and they said that there is no way to get PMI removed unless you have 20% equity in the house. So it sounds like perhaps this isn't an option for me.

Having 20% equity is not the same as paying 20% down on your mortgage.  Meaning that Equity is Value minus Mortgage, not Mortgage minus Paydown of Mortgage.   Banks want to know that if they have to foreclose that there is a buffer of 20%.  The Value of your house can increase to give them that buffer independent of paying down the mortgage. 

You say:
[A]ccording to Redfin my house is worth $60K more than I paid for it, but obviously who know's how accurate that is.

Redfin is surprisingly accurate (much more so than Zillow due to them having realtors as well) if you are in a larger city to do having more comps.  This thread got a bit derailed on the pay off v. invest conversation, which is great.  But your comment here is getting ignored. 

Your amount to remove PMI is $23,695.  If your home value increase is even 40% of what Redfin says, then you can get it cleared without making additional payments.

So, take these steps.  Call back Wells Fargo and confirm that if you get a new appraisal showing a higher appraisal that the PMI will be removed.  I would suggest getting something in writing confirming this, or have them point out in your loan documents where that is allowed.

Second, (or first if you want) get what is called a Broker Price Opinion or Comparative Market Analysis.  You can either ask a realtor friend or pay one to do it for you for a very low fee.  This will tell you what a realtor would list your price for, and is the main basis for a formal appraisal. 

If the value comes back near the $60,000, then proceed with joy and wonder in your heart at the beauty of internet friends walking you through a third option you were unaware of that is the best of all worlds.  If it is closer to the $24,000 you need, or if your property has major black marks (foundation issues, pink and green bathroom tiling, next to a large multifamily) that might depress the appraisal value, you can hold on the PMI until you pay down/appreciate more, or proceed forward knowing you may have to bring 3-4 grand to the table to meet the mark. 

If the value comes out only nominally better and leaving you without the new appraisal option, then you have the current debate to educate you on the best path forward.

I for one believe that Redfin will not be so far off the mark, and that you will be at or close enough in a new value to remove PMI.  Once you get that removed, congratulations, and now you face the hard part, which is actually putting the PMI savings you received, and the intended paydown, towards investments instead of finding some excuse to not investing now. 

Looking forward to hearing about your success. 

Dicey

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #31 on: December 19, 2018, 10:45:41 AM »
Nice post, @Check2400!

clarkfan1979

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #32 on: December 20, 2018, 06:00:11 AM »
I just paid off my PMI on a rental house that used to be my primary. I put 5% down on a 95K house.  The PMI wouldn't drop until I got my loan balance down to $74,100, which happened this month. It took me 6 years. I didn't pay extra because the interest rate on the mortgage loan was at 4%. The PMI cost me $42/month, but now it's gone. The house is now worth around 250K.


FIPurpose

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #33 on: December 20, 2018, 06:10:07 AM »
I just paid off my PMI on a rental house that used to be my primary. I put 5% down on a 95K house.  The PMI wouldn't drop until I got my loan balance down to $74,100, which happened this month. It took me 6 years. I didn't pay extra because the interest rate on the mortgage loan was at 4%. The PMI cost me $42/month, but now it's gone. The house is now worth around 250K.

If that were me, I'd think about selling the house if it still qualifies for tax-free capital gains (2 qualifying years out of the last 5 I think). You'd save somewhere around $15k in taxes if you sell now. But then again, I'm not really into owning rentals.

TexasRunner

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #34 on: December 20, 2018, 08:26:18 AM »
I just paid off my PMI on a rental house that used to be my primary. I put 5% down on a 95K house.  The PMI wouldn't drop until I got my loan balance down to $74,100, which happened this month. It took me 6 years. I didn't pay extra because the interest rate on the mortgage loan was at 4%. The PMI cost me $42/month, but now it's gone. The house is now worth around 250K.

If that were me, I'd think about selling the house if it still qualifies for tax-free capital gains (2 qualifying years out of the last 5 I think). You'd save somewhere around $15k in taxes if you sell now. But then again, I'm not really into owning rentals.

Its not a primary residence so that exclusion doesn't apply...  Unless I'm missing something.

Is it possible to consider a house your primary residence even after you have moved out and held it as a rental?

/tangent  :)

wbranch

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #35 on: December 20, 2018, 10:18:46 AM »
I just paid off my PMI on a rental house that used to be my primary. I put 5% down on a 95K house.  The PMI wouldn't drop until I got my loan balance down to $74,100, which happened this month. It took me 6 years. I didn't pay extra because the interest rate on the mortgage loan was at 4%. The PMI cost me $42/month, but now it's gone. The house is now worth around 250K.

If that were me, I'd think about selling the house if it still qualifies for tax-free capital gains (2 qualifying years out of the last 5 I think). You'd save somewhere around $15k in taxes if you sell now. But then again, I'm not really into owning rentals.

Its not a primary residence so that exclusion doesn't apply...  Unless I'm missing something.

Is it possible to consider a house your primary residence even after you have moved out and held it as a rental?

/tangent  :)

Its where the 2 out of 5 years comes into play. Can live in it for 2 years move out and start renting and sell in the 5th and exclude most of the gain. There is still depreciation recapture for the 3 years the house was depreciated and some other calculations to complete. There is a worksheet here under "Business or Rental Use of Home" https://www.irs.gov/publications/p523#en_US_2017_publink100072704

Boofinator

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #36 on: December 20, 2018, 10:27:31 AM »
I had analyzed some of the tradeoffs between owning PMI and not a little while back. The conclusions I came to were that in general, 1) it makes sense to pay 20% down to avoid PMI, but 2) if you have PMI, it makes sense to just keep it and invest rather than paying it off (assuming you have a long investment horizon).

robartsd

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #37 on: December 20, 2018, 11:32:33 AM »
Its not a primary residence so that exclusion doesn't apply...  Unless I'm missing something.

Is it possible to consider a house your primary residence even after you have moved out and held it as a rental?

/tangent  :)

Its where the 2 out of 5 years comes into play. Can live in it for 2 years move out and start renting and sell in the 5th and exclude most of the gain. There is still depreciation recapture for the 3 years the house was depreciated and some other calculations to complete. There is a worksheet here under "Business or Rental Use of Home" https://www.irs.gov/publications/p523#en_US_2017_publink100072704
Prior to 2008 you could move back in to the house for 2 years before selling to claim the exemption, but that doesn't fully work any more. Since 2008, appreciation attributed to use other than primary residence use is excluded from the exemption (days of use other than primary use since 2008/total days owned); however, rental use only after moving out as a primary residence can be ignored in that calculation.

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #38 on: December 20, 2018, 11:35:02 AM »
We are currently in the endless paperwork labyrinth that comes with purchasing a house...assuming the sale goes through, we are planning to do so with 15% down and so will find ourselves in a situation with PMI involved. Haven't run the numbers yet, so posting to follow (and bookmark the great analysis you guys are doing in this thread - will be very helpful).

Check2400, that post was awesome. In the next few months, this approach may wind up saving us quite a bit of money.

TexasRunner

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #39 on: December 20, 2018, 12:12:29 PM »
[quote author=TexasRunner link=topic=96618.msg2235547#msg2235547 date=154531957
Its where the 2 out of 5 years comes into play. Can live in it for 2 years move out and start renting and sell in the 5th and exclude most of the gain. There is still depreciation recapture for the 3 years the house was depreciated and some other calculations to complete. There is a worksheet here under "Business or Rental Use of Home" https://www.irs.gov/publications/p523#en_US_2017_publink100072704
Prior to 2008 you could move back in to the house for 2 years before selling to claim the exemption, but that doesn't fully work any more. Since 2008, appreciation attributed to use other than primary residence use is excluded from the exemption (days of use other than primary use since 2008/total days owned); however, rental use only after moving out as a primary residence can be ignored in that calculation.

It was the combo of these two things I had in mind, and the 2008 changes.

Thanks for posting, I had forgotten about all the options regarding capital gains and going into rentals soon, I'll want to keep it in mind.

robartsd

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #40 on: December 20, 2018, 02:16:21 PM »
It was the combo of these two things I had in mind, and the 2008 changes.

Thanks for posting, I had forgotten about all the options regarding capital gains and going into rentals soon, I'll want to keep it in mind.
If you could get everything lined up perfectly, you could buy a house, live in it for two years, rent it out for two years, then sell only paying taxes on depreciation recapture. If you cycled through properties doing this perfectly you could earn ~4 years of residential property appreciation tax free every 24 months - but it's probably much more realistic to target ~4.5 years of residential property appreciation every 30 months.

Back on topic. I plan to pay my mortgage on schedule (purchased with 5% down) and request a removal of PMI when appreciation brings LTV into range (my loan requires 75% LTV if removing PMI based on appreciation alone in years 2-5). According to Redfin Estimate and Zestimate, I'm easily already there, but a significant number of the comps they pull are a better neighborhood and most have better overall finishes. Using Redfin's tool to create an owner's estimate I selected the 5 lowest value comps (4/5 are still slightly higher finish - one of them in the better neighborhood - the lowest was a fixer in my neighborhood) I'm just about $2,000 short of the valuation needed. Redfin's adjusted price just based on the fixer alone about $10,000 short of the valuation I would need. At $105 I doubt the lender's BPO is more than a drive by, so I could plan to make extra efforts on improving curb appeal this spring and request a valuation this summer with a very good shot of getting a value high enough.

Dicey

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #41 on: December 21, 2018, 06:39:20 AM »
We are currently in the endless paperwork labyrinth that comes with purchasing a house...assuming the sale goes through, we are planning to do so with 15% down and so will find ourselves in a situation with PMI involved. Haven't run the numbers yet, so posting to follow (and bookmark the great analysis you guys are doing in this thread - will be very helpful).

Check2400, that post was awesome. In the next few months, this approach may wind up saving us quite a bit of money.
Wow, @Vertical Mode, that's a tough call. What is not putting that last 5% down going to cost you? I would take a close look at that math before pulling the trigger. I get that there's a place for PMI, but in your case, it might not be worth it. Can you use your mustachian skills to come up with another 5%? Sell something(s), liquidate something, borrow something or a combination of all three?

Vertical Mode

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #42 on: December 21, 2018, 07:57:53 AM »
We are currently in the endless paperwork labyrinth that comes with purchasing a house...assuming the sale goes through, we are planning to do so with 15% down and so will find ourselves in a situation with PMI involved. Haven't run the numbers yet, so posting to follow (and bookmark the great analysis you guys are doing in this thread - will be very helpful).

Check2400, that post was awesome. In the next few months, this approach may wind up saving us quite a bit of money.
Wow, @Vertical Mode, that's a tough call. What is not putting that last 5% down going to cost you? I would take a close look at that math before pulling the trigger. I get that there's a place for PMI, but in your case, it might not be worth it. Can you use your mustachian skills to come up with another 5%? Sell something(s), liquidate something, borrow something or a combination of all three?

Already tapped out all 3 of those options! :-)

This year was sort of unique in that I spent half of it unemployed while making a career change. Unfortunately, that meant liquid assets were not in an especially strong position since I was living off savings, and I sold a good part of my taxable investments to come up with as much of the down payment as we were able to scrape together. The silver lining was, that since I made so much less money than anticipated this year, that I had a lot of headroom to sell stocks with 0% capital gains due to low tax bracket. We also received a gift, completely unsolicited, from my parents, which helped get us to 15% (I tried to refuse, but Dad is a stubborn German and wouldn't hear of it).

As it was explained to us, there are "cliffs", so to speak, in how PMI is assessed. There is one at 10% and a lower level of it at 15% with no dropoff in between, so there is not much incentive to go higher than 10% unless you can get all the way to 15%. I dislike the idea of having PMI but getting to 20% down in order to avoid it would be too much of a stressor on our finances given our current level of liquid assets, and my peace of mind also has a value. Plus, as I just learned from this thread, the repairs we'll be doing on the place immediately upon purchase should raise its value and therefore our equity, which may just enable us to get out of PMI early!

GF and I were not planning to be in the market for a house for another 2 years; but everyone has a plan until something unexpected occurs. We stumbled upon what I will refer to as a "unique buying opportunity" that was unlikely to be there even a few months later, and decided we had to have it!

robartsd

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #43 on: December 24, 2018, 08:21:54 AM »
Plus, as I just learned from this thread, the repairs we'll be doing on the place immediately upon purchase should raise its value and therefore our equity, which may just enable us to get out of PMI early!
My loan's PMI conditions only allows removal of PMI based on increased value after 2 years unless "substantial" improvements have been made. I've never looked into what would be considered "substantial" as I was pretty sure the improvements I expected to make in the first few years would not be. Sounds like you should be good to remove PMI after no more than 24 months.

Vertical Mode

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #44 on: December 27, 2018, 08:19:38 AM »
Plus, as I just learned from this thread, the repairs we'll be doing on the place immediately upon purchase should raise its value and therefore our equity, which may just enable us to get out of PMI early!
My loan's PMI conditions only allows removal of PMI based on increased value after 2 years unless "substantial" improvements have been made. I've never looked into what would be considered "substantial" as I was pretty sure the improvements I expected to make in the first few years would not be. Sounds like you should be good to remove PMI after no more than 24 months.

Sure hope so! Didn't realize there was a qualifier in there, I'll have to double check whether ours also has that clause. I suppose the initial batch of work we are doing probably qualifies as "substantial" in any case, but this is good to know. Thanks for the heads up!

robartsd

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Re: Should I quickly pay down my mortgage to eliminate PMI?
« Reply #45 on: December 27, 2018, 09:48:27 AM »
Sure hope so! Didn't realize there was a qualifier in there, I'll have to double check whether ours also has that clause. I suppose the initial batch of work we are doing probably qualifies as "substantial" in any case, but this is good to know. Thanks for the heads up!
Before moving in, we basically just cleaned and painted. Within the first two years we also replaced the sewer line - not sure the bank would consider that "substantial" but the need for it to be done was part of our negotiating the sale.