@Goldielocks
That is a very good point you make, they are fees. So if you pay the interest of 3.875% for 30 years on that 7k wouldn't you still be better off rolling that 7k into the loan so that you could use your 7k to be invested for 30 years at an average of 7% a year?
I'm really interested in this scenario especially since I may be refinancing myself soon.
I am struggling to put a pin on the precise reason this move to refinance doesn't sit all that well with me as a "great move". The finances work out. Shedding 1% interest on a 30 year loan is a huge benefit.
I think that it is the practice of paying more origination fees to get a new mortgage, when the current one is less than a year old. I have a solid dislike for paying fees, especially when they are more than $1000.
I definitely feel for the need to not pay fees but you have to realize that you are still paying fees with a "no fee" mortgage refi. It's called an interest rate premium. So my option was 4.18% with 3k in fees vs 3.875% with 8k in fees. I probably could have gotten a 4.325% with absolutely "no fees". After running the break even in all scenarios I decided to go with the lower rate at an 18 mo break even.
If the point made above, that the new lower rate is a combination of dilligent paying off other debts, and a reduction in going rates. (which is fantastic), then why not wait to save up enough, or perhaps borrow enough (that you would quickly pay off) to get rid of the PMI before you refinance? Many people get about 5-8 years into their mortgage and work very hard to try to get the PMI removed... why not take the opportunity to remove it now?
$122 PMI x 360 payments = $43,920 (Is that right? that the PMI payment is only for the insurance, and not part principal)
Plus approx $7k origination fees.... which ok, are better invested, IF you can get 7% guaranteed returns, and IF you actually put another $7k into investments and could not save the cash.. but reupping the amount, especially for such a small amount, seems to be a bit of a lazy financial habit, rather than a diligent decision?
Oh man.......
First, Rates have taken a 1% dive in the last 6 months from the previous peak... Just look at Zillows rate history chart.
Second, the first rate was with a specific, well known, local lender that could pre-underwrite us and accommodate a 15 day closing. This made our offers much stronger. We still got lost out on 3 homes and some went for 100k over asking. All of them were all-cash offers so it was important to make our offers as attractive as possible. Having a reputable local lender, being pre-underwritten, and accommodating a closing as quick as 15 days was our strategy. Our rate was probably .25% higher than the best rate I could find from an out of state known by nobody lender.
Third, and most importantly, PMI with conventional loans automatically drops off after the loan reaches 78-80% LTV. Which mean your PMI calculation of 122x360 is way off(my PMI is scheduled to drop off after 8 years or 96 payments). This also means I could make a principal payment tomorrow and get rid of PMI if I wanted to. In order to get rid of PMI you need 20% LTV. It would take an additional 96k to drop PMI off of the loan. If that 96K is invested in VTSAX, the dividends alone will exceed the cost of PMI. If you calculate the PMI charges against the 96k it is a 1.525% interest rate increase over the base interest rate of 3.875%. So I am basically keeping that money in the market at a cost of 5.4%.
Here is where things get interesting though regarding PMI. It is a fixed cost and does not decrease until you hit that 20% LTV number. So if you are 5 years in on the mortgage and 85% LTV your PMI cost is greater because now the only thing that is keeping you away from dropping that PMI is 5% LTV and not 15% LTV. This is when it can be enticing to refinance, put some extra money in, and drop PMI off. However, I would only do a refi in this scenario if you are taking a drastically lower interest rate or if you for some horrible reason have an FHA loan where the PMI last the life of the loan. In general, FHA loans suck compared to conventional loans because of the high closing costs and high PMI rates.
Contrast to:
Refiance at $601k -- > save $7k in origination fees, but lose 7k that could have gone to other investments. Yeah, I understand the math that this is better invested, except they are paying PMI on this $7k.
Alright, so when you refi your PMI costs are calculated based on your credit score, income, and LTV of the new mortgage. In almost every case that I have seen your PMI only decreases after key LTV values are reached. Usually 95% 90% 85% and 80%, 80% LTV being no PMI at all of course.
So when you talk about paying 7k into the refi in order to lower PMI it will ONLY lower PMI if it results in the LTV of the loan breaking these key points. Going from 95% LTV to 94% LTV results in the same exact PMI, the only saving you will get is from the loan rate which was 3.875% in my case.
Refinance at $545k (Amount with no PMI, guess, approximate) --> save the $43,920 in PMI costs, Therefore the amount of borrowed money that PMI is needed for (I assume $60k) is actually borrowed at just under 7% interest, when you add the insurance cost to the mortgage rate.
See above. 5.4% total interest rate on the 15% LTV or 96k in this case.
There is only marginal value in not paying down the $60k of PMI versus investing at 7%, infact, I would say that you need to be getting 9% or better in your investments, over 30 years, to make it worth the risk differential to keep the PMI. AND, there is also the risk that arises with having very high mortgage payments and employment that is not guaranteed for 30 years at the current income levels.
So, if the goal is to keep yourself fully invested in the market, while reducing your mortgage rate to as low as possible, should not that also include getting rid of PMI as quickly as possible? Doesn't adding $7k of origination fees to one's mortgage work against that?
In the case of a job loss, I would much rather have the money liquid and in the market in order to continue paying the mortgage than tied up in the house with no access to it. This greatly increases your options and the period of time you have to land a new job before you start missing payments.
Why not instead..
Pay down the mortgage to 50% equity, and borrow at low (tax deductible) rates against the property to invest. Depends on the rate you can get, and your current income tax bracket, but is even more flexible than keeping all the borrowing as one fixed mortgage investment, because you could theoretically pay off the investment loan on a moment's notice by selling your investments if you lose your job. Many mortgages do not accept very large single year pay offs.
Woah woah woah... The whole purpose of this thread is to divert money to investments instead of paying off the low-interest rate mortgage. This is not the Mortgage Payoff Club so I see no point in accelerating payoff until 50% LTV, 80% LTV is definitely debatable depending on PMI costs which are unique to each person... That being said, you should still only finance what you feel comfortable paying for on a monthly basis(aka mortgage payment).
I'm not sure why you think "Many mortgages do not accept very large single year pay offs." They may not like it but they don't have a choice if your mortgage has a "no pre-payment penalty" clause. Which almost all conventional mortgages have. If you are trying to refi and the new mortgage has pre-payment penalties then you need to RUNNNNN.
At the end of the day, all of the above is trumped by the significantly lower mortgage rate over 30 years.
I can't help thinking that the poster did not shop around for the best rate originally and now is making a solid good decision to fix that... but still being lazy by not taking the opportunity to pay it down a bit to accelerate PMI elimination.
Well, that's kind of insulting.... I'm a lot of things... But when it comes to finances, the last thing I am is lazy.
In regards to PMI though, for many people, it is definitely better to pay it off as quick as possible. High income, great credit, and shopping around got me some great PMI rates. In some cases, I was quoted 2x the amount of PMI. If my credit was in the high 600's or low 700's PMI could have easily been 250-300mo.
For what it's worth, our savings rate with automated investments is 40%. After bonuses and stock, it will be about 50% projected for 2019. We are also in a good position for career growth so the goal is to get our savings rate to 60-75% within the next 3 years or so.