Avoiding Primary Mortgage Insurance

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Avoiding Primary Mortgage Insurance

Postby siebgal » Thu Mar 21, 2013 12:06 am

Not sure if this is the right forum:
We are refinancing for $316k at 3.375 APR. We are required to pay primary mortgage insurance because our house appraised at $355k. To avoid this, we would have to reduce the amount of the loan to $289k, which is $32k out of savings. We do have this. My husband thinks we should pay this amount. I'm nervous about shelling out so much. It would still leave us with a 6-8 month emergency fund. Thoughts?
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Re: Avoiding Primary Mortgage Insurance

Postby BL » Thu Mar 21, 2013 2:07 am

I would definitely pay the extra to avoid PMI.
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Re: Avoiding Primary Mortgage Insurance

Postby Outer Marker » Thu Mar 21, 2013 7:02 am

Agree. The marginal return on the additional amount needed to get rid of the PMI is likely 6% or more (the cost of the morgtage rate on this amount, plus the PMI cost itself which is soley attributed to the $30,000). No where you can get that guaranteed risk free return. PMI is money down the drain. Your emergency reservses sound adequate, but you can build them up each month by putting the PMI savings into your account instead of handing it to the mortgage company.
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Re: Avoiding Primary Mortgage Insurance

Postby EHoops » Thu Mar 21, 2013 7:02 am

I would definitely do it...I cannot explain all of the math/accounting for you like some other posters...the PMI payment is currently still a minor tax 'benefit' yet it's not money well spent and it is annoying to get rid of it. Since you have 6-8 months in savings that makes the decision easy for me.
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Re: Avoiding Primary Mortgage Insurance

Postby dickenjb » Thu Mar 21, 2013 7:17 am

I would pay the extra also. And I believe PMI = Private Mortgage Insurance.
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Re: Avoiding Primary Mortgage Insurance

Postby NYBoglehead » Thu Mar 21, 2013 7:26 am

I would pony up the money to avoid PMI as well. Especially since you said you will still have a good emergency fund afterwards. In this low interest rate environment, avoiding unnecessary interest expense is extremely important.
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Re: Avoiding Primary Mortgage Insurance

Postby dm200 » Thu Mar 21, 2013 9:10 am

yes, based on what you say, you still would have an emergency fund by paying extra and avoiding PMI. From what I am told, once you get PMI, it is a challenge to get it removed, even when the value goes up and/or the principal balance goes down. Remember also that your monthly payment will be less both because of no PMI and you are financing less. I suggest stashing that "extra" right back into your emergency fund.
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Re: Avoiding Primary Mortgage Insurance

Postby BuckyBadger » Thu Mar 21, 2013 9:29 am

I would absolutely do it. If it would wipe you out cash-wise, maybe not, but if you would still have 6-8 months of emergency fund I would absolutely do it.
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Re: Avoiding Primary Mortgage Insurance

Postby hand » Thu Mar 21, 2013 10:29 am

Another vote for paying whatever required to eliminate PMI since you will have sufficient emergency funds left over.

If removing $32k from savings causes other hardships, you could consider restructuring your debt instead of paying it off... Perhaps a Home Equity loan or a loan against an existing car would make you feel more comfortable with your cash position without committing to PMI.
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Re: Avoiding Primary Mortgage Insurance

Postby dm200 » Thu Mar 21, 2013 10:46 am

hand wrote:Another vote for paying whatever required to eliminate PMI since you will have sufficient emergency funds left over.

If removing $32k from savings causes other hardships, you could consider restructuring your debt instead of paying it off... Perhaps a Home Equity loan or a loan against an existing car would make you feel more comfortable with your cash position without committing to PMI.


I agree, except that I suspect a home equity loan is not practical/possible until some period of time after settling on the refinanced first mortgage. As far as refinancing auto loans, if the value of the car will support it, many credit unions are happy to do such loans.
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Re: Avoiding Primary Mortgage Insurance

Postby OneDay » Thu Mar 21, 2013 10:21 pm

I am surprised no one has asked how long you plan to live in the house. If it is a long time then I would be in favor of putting the equity in so you wouldn't have PMI. If you did have PMI and housing prices drop then that PMI would be on for a long time. If you we're only going to be in it for a short while then I doubt it makes much of a difference.
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Re: Avoiding Primary Mortgage Insurance

Postby Outer Marker » Thu Mar 21, 2013 11:06 pm

OneDay wrote:I am surprised no one has asked how long you plan to live in the house. If it is a long time then I would be in favor of putting the equity in so you wouldn't have PMI. If you did have PMI and housing prices drop then that PMI would be on for a long time. If you we're only going to be in it for a short while then I doubt it makes much of a difference.


It makes a difference every month. Same as taking $150 out of your wallet and burning it. Adds up quickly. Zero is the right amount of times to do this.
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Re: Avoiding Primary Mortgage Insurance

Postby Cyclone » Fri Mar 22, 2013 1:01 am

It looks like you have enough opinions to make a decision, but I'll pile on. Think about it - does the insurance benefit you or the bank? On the other hand, I work for a bank. If your mortgage is with us, by all means get the PMI! Best money you will ever spend.
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Re: Avoiding Primary Mortgage Insurance

Postby Ketawa » Fri Mar 22, 2013 1:15 am

siebgal wrote:Not sure if this is the right forum:
We are refinancing for $316k at 3.375 APR. We are required to pay primary mortgage insurance because our house appraised at $355k. To avoid this, we would have to reduce the amount of the loan to $289k, which is $32k out of savings. We do have this. My husband thinks we should pay this amount. I'm nervous about shelling out so much. It would still leave us with a 6-8 month emergency fund. Thoughts?


If you are eligible to join Navy Federal Credit Union, several of their loans have no PMI up to 90% LTV. I think the 30- and 15-year FRM and 5/5 ARM loans are included.
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Re: Avoiding Primary Mortgage Insurance

Postby Mudpuppy » Sat Mar 23, 2013 5:26 pm

Is this PMI (conventional mortgage) or MIP (FHA mortgage)? FHA MIP is to be avoided at all costs, particularly since the new cancellation policy going into effect on June 3, 2013 will make it very hard to cancel MIP and the new policy going into effect on April 1, 2013 increases the premiums. The new cancellation policy does not allow cancellation of MIP at all if the original LTV ratio is >=90% and requires 11 years of paying MIP for loans with an original LTV ratios between 80-90%. There is no policy to cancel FHA MIP based on current LTV ratios. FHA MIP is to be avoided at all costs.

Conventional PMI is much easier to cancel. You are allowed to cancel when you fall below 80% LTV, either due to market conditions or prepayment. However, you probably will have to pay for an appraisal to prove the LTV. That can be a gamble, since appraisals can be all over the place, depending on which person does the appraisal. If you can avoid this in the first place and still have an emergency fund, it might be worth it, just to avoid the hassles and uncertainty.
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Re: Avoiding Primary Mortgage Insurance

Postby TSR » Sat Mar 23, 2013 5:39 pm

Mudpuppy wrote:Conventional PMI is much easier to cancel. You are allowed to cancel when you fall below 80% LTV, either due to market conditions or prepayment.


Be careful here. I have PMI on my current mortgage, but it cannot be cancelled due to market conditions or improvements that add value. My PMI agreement states that I can only cancel on one of two "dates":

1. The date the principal balance of your loan is first scheduled to reach 80% of the original value of the property, based solely on the initial amortization schedule for your loan and irrespective of the outstanding balance of your loan on that date. . . . (original value is defined as either the contract price of the property or the appraised value of the property at the time the loan is consummated)
2. The date the principal balance of your loan actually reaches 80% of the original value of the property, based solely on your actual loan payment.
(all emphasis in original)

For the OP, this means it can be that much harder to get rid of PMI and is another reason not to get it!
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Re: Avoiding Primary Mortgage Insurance

Postby Mudpuppy » Sat Mar 23, 2013 7:14 pm

TSR wrote:
Mudpuppy wrote:Conventional PMI is much easier to cancel. You are allowed to cancel when you fall below 80% LTV, either due to market conditions or prepayment.


Be careful here. I have PMI on my current mortgage, but it cannot be cancelled due to market conditions or improvements that add value. My PMI agreement states that I can only cancel on one of two "dates":

1. The date the principal balance of your loan is first scheduled to reach 80% of the original value of the property, based solely on the initial amortization schedule for your loan and irrespective of the outstanding balance of your loan on that date. . . . (original value is defined as either the contract price of the property or the appraised value of the property at the time the loan is consummated)
2. The date the principal balance of your loan actually reaches 80% of the original value of the property, based solely on your actual loan payment.
(all emphasis in original)

For the OP, this means it can be that much harder to get rid of PMI and is another reason not to get it!

With a little web searching, I think I sussed out the issue here. The letter of the law from the Homeowner's Protection Act (HPA) only requires "original value", as listed above. However, Freddie and Fannie added the option of using "current value" (as shown by an appraisal). If you have a Freddie or Fannie loan, you can cancel based off current value or original value. Freddie and Fannie also added another wrinkle, which is that the original value can be voided if the market has *depreciated* greatly, so that is a bit of a two-edged sword there.

If the financial institution first holds the loans in their own mortgage holdings, you would only have the HPA disclosure in your closing documents (because that would be all that would apply to a privately held mortgage). If you later receive a letter stating that the loan was sold/transferred to Fannie or Freddie, you are now under their cancellation rules and the paperwork in your closing document is outdated. You should get an updated disclosure in your annual impound account statements in that case.
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Re: Avoiding Primary Mortgage Insurance

Postby OneDay » Sat Mar 23, 2013 9:40 pm

Outer Marker wrote:
OneDay wrote:I am surprised no one has asked how long you plan to live in the house. If it is a long time then I would be in favor of putting the equity in so you wouldn't have PMI. If you did have PMI and housing prices drop then that PMI would be on for a long time. If you we're only going to be in it for a short while then I doubt it makes much of a difference.


It makes a difference every month. Same as taking $150 out of your wallet and burning it. Adds up quickly. Zero is the right amount of times to do this.



You would make it a wash at 6% interest on that 32k. So I wouldn't say zero is right 100% of the time. For example you could chunk that money in only to see prices drop and if you need to leave the house you pretty much lost the 32k. Not putting it in if there are short term considerations will at least give you options. If it is a long term consideration then that isn't an issue.
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Re: Avoiding Primary Mortgage Insurance

Postby TSR » Sun Mar 24, 2013 3:13 pm

Mudpuppy wrote:With a little web searching, I think I sussed out the issue here. The letter of the law from the Homeowner's Protection Act (HPA) only requires "original value", as listed above. However, Freddie and Fannie added the option of using "current value" (as shown by an appraisal). If you have a Freddie or Fannie loan, you can cancel based off current value or original value. Freddie and Fannie also added another wrinkle, which is that the original value can be voided if the market has *depreciated* greatly, so that is a bit of a two-edged sword there.

If the financial institution first holds the loans in their own mortgage holdings, you would only have the HPA disclosure in your closing documents (because that would be all that would apply to a privately held mortgage). If you later receive a letter stating that the loan was sold/transferred to Fannie or Freddie, you are now under their cancellation rules and the paperwork in your closing document is outdated. You should get an updated disclosure in your annual impound account statements in that case.


This is interesting and helpful. Thanks!
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