Pay Down Mortage to Remove PMI

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atDev
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Pay Down Mortage to Remove PMI

Post by atDev »

I have the following loan:
Balance: 292,674.40
Rate: 4.5%
LTV: 87.1% (might be higher due to home devaluation)
Monthly Payment: $2,026.46 ($181.44 is PMI)
Refinanced on 03/09/09 for $302,400.00 loan.

Pay down to get 80% LTV and remove PMI or invest that $?
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jjg247
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Post by jjg247 »

Personally, I would try to eliminate PMI but it would probably depend on some other factors...

1. Are you contributing for full match in 401k?
2. How is your emergency fund?
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grabiner
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Post by grabiner »

jjg247 wrote:Personally, I would try to eliminate PMI but it would probably depend on some other factors...

1. Are you contributing for full match in 401k?
2. How is your emergency fund?
Assuming you have those two, getting rid of the PMI is valuable; if you need to pay down $50,000, say, then you not only save $2250 in annual interest, but also save $1937 in PMI (and, depending on your income, that premium may not even be deductible, which makes getting rid of it still better), a total of $4187. Thus you are effectively getting a return of 8.4%, not 4.5%, on this payment.
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tfb
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Post by tfb »

grabiner wrote:Thus you are effectively getting a return of 8.4%, not 4.5%, on this payment.
Keep in mind that 8.4% would only last five years or so, until you would otherwise be able to remove PMI without the prepayment. At such point, the return from prepayment drops back down to 4.5%. That said, I would still prepay and get rid of PMI.
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Random Musings
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Post by Random Musings »

When I see PMI - it usually tells me (in no particular order):

- the buyer(s) can't be patient to save before buying
- the buyer(s) are buying a little too much home relative to their current situation.
- the buyer(s) can't save
- the buyer(s) are leveraged in other areas as well
- the buyer(s) believe that money can be used better for other purposes - which to me is other to buy more stuff or to invest in other assets that hopefully make more than the PMI loan.

RM
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Tyrobi
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Post by Tyrobi »

If I am in your situation I would pay down enough to get rid of PMI, provided you are capable of doing it without eroding your EF nor matching 401k contribution. PMI is a waste of money.
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tj
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Post by tj »

at least before the end of 2010, as the tax deductibility of PMI is expiring, right?
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atDev
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Post by atDev »

- the buyer(s) can't be patient to save before buying
We did not want to put down a large down payment due to wanting to keep some savings, so yes, we probably could have waited to save a bit more. Either way, the question concerns what to do now that we have PMI, not what we should have done :)
- the buyer(s) are buying a little too much home relative to their current situation.
The home is affordable for us. PMI was used because we did not have past year tax returns to really prove our financial situation. I had just started a successful business and we were not married yet.
- the buyer(s) can't save
We have about 300k in savings and are in our 20's.
- the buyer(s) are leveraged in other areas as well
- the buyer(s) believe that money can be used better for other purposes - which to me is other to buy more stuff or to invest in other assets that hopefully make more than the PMI loan.
Investing, but which is why I asked this question to see.

Also it is worth it to note that we can not deduct it on our return.
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atDev
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Post by atDev »

It looks like it would be about 25k to remove PMI.

We have 130k in retirement savings. 70k personal savings. 130k business savings (single member S corp).

We generally max out IRA's each year. I think we could fairly easily pay this from savings? I just wanted to be sure it was not worth it to invest this money instead.
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jjg247
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Post by jjg247 »

Pay enough to get rid of PMI, it's "insurance" that doesn't benefit you in any way, shape or form. Temporary hit to your 70k savings, but you can pay that back over time.
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pteam
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Post by pteam »

Get rid of the PMI its a guaranteed investment of 8.4%! Thats like the Holy Grail of investing right now!
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Swamproot
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Post by Swamproot »

Random Musings wrote:When I see PMI - it usually tells me (in no particular order):

- the buyer(s) can't be patient to save before buying
- the buyer(s) are buying a little too much home relative to their current situation.
- the buyer(s) can't save
- the buyer(s) are leveraged in other areas as well
- the buyer(s) believe that money can be used better for other purposes - which to me is other to buy more stuff or to invest in other assets that hopefully make more than the PMI loan.

RM
Guilty on most counts. :-)

I was younger and dumber, but luckily bought a small house with a 15 year mort. payment that was about 20% of MY take home, excluding my wife. At the time I figured money for PMI was better than money to the landlord. Then the water heater broke. :-)

I paid it down in a hurry but don't forget that you have to pay to get it appraised to make sure that it hasn't dropped in value, and if it has you will have to wait. IIRC the 80% is for CURRENT VALUE while its automatic at 76% of LOAN VALUE.
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BruceM
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Post by BruceM »

You might have already done this, but you might want to check your borrowing contract, as there are some lenders that require a 75% LTV before removing PMI.

And although avoiding PMI, or shedding it as soon as you can afford to, is good general advice, you need to be mindful of other needs you might have for that available cash. As already mentioned, 401(k) contributions to the extent of a match and emergency reserves....but also do you have any high interest debt, like credit cards, personal notes or private student loans that should be retired first?

BruceM
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DiscoBunny1979
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Re: Pay Down Mortage to Remove PMI

Post by DiscoBunny1979 »

atDev wrote:I have the following loan:
Balance: 292,674.40
Rate: 4.5%
LTV: 87.1% (might be higher due to home devaluation)
Monthly Payment: $2,026.46 ($181.44 is PMI)
Refinanced on 03/09/09 for $302,400.00 loan.

Pay down to get 80% LTV and remove PMI or invest that $?
-----------

I would definately check to make sure what the lender would consider is the "value" of the property. Is the value the appraisal that was done at refinance time, or is the value something that has to be determined by a new appraisal now that it's over a year after that refinance. You could be looking at a much higher payment to get rid of PMI because your loan might very well be what your property is valued at today. You could even check a website like Zilow or Chase.com to determine what they would price your house at to get comparisons.
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dave.d
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Post by dave.d »

My wife and I stretched slightly at the initial purchase of our first house. We chose to pay off enough to eliminate the PMI at first opportunity. It seemed like a needless expense that did not benefit us.
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atDev
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Post by atDev »

Hi,

- The only other debt I have is about 9k in student loans at 4.5%.

- They state 80% of the LTV requirement on the website for my loan. Of course a new appraisal may shift the payment needed.
Ben | Young Investor and Learning
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giacolet
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Remove PMI

Post by giacolet »

Has anyone here ever seen a PMI Insurance Policy? Just a joke. I don't believe the policy exists. You just pay the premium as if it were for real.

Removing PMI is not a unilateral decision on your part.

You are going to have to supply a current appraisal acceptable to the Lender and/or the secondary market holder of your mortgage.

You are going to have to bring the loan down to below 80% of the new (lower) appraised value. In a declining home price market the Lender may want the loan paid down more than 80%.

Fannie Mae and Freddie Mac may not allow the PMI to be released depending on the pool your mortgage is in.
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jjg247
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Post by jjg247 »

My wife and I are saving for a down payment now and one of our absolute "musts" for a home is that we are able to put 20% down. I have a fear that if we were to buy with 10-15% down we would end up needing to bring more money to the table if/when the lender would let us pre-pay to remove PMI.

While I understand the need for PMI, in this market would 20% equity in a property even be enough to protect the lender? :lol:
El Jefe
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Post by El Jefe »

...effectively getting a return of 8.4%
I respectfully disagree with the above calculations.

My math could be wrong here, but you are basically holding two mortgages.

The first mortgage is $268,816, the LTV of 80%. On this you pay a 4.5% rate.

The second mortgage is the remaining of the principal balance, or $23,857. You also pay interest of 4.5% here. But additionally, you pay $181.44/month on this mortgage in insurance, which is a kind of interest. So your monthly "interest plus insurance" payment on this balance is $270.91 .

($270.91 ~= $181.44 + $89.47).

All told this is an effective interest rate of about 14.5% on the "second mortgage", i.e. the principal above 80% LTV.
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Post by El Jefe »

My point being, your marginal rate of return on other investments needs to pass 14.5%.

So unless the obvious aren't taken care of (i.e. emergency fund, employer 401k match, high-interest credit card debt), then I can assure you nowhere else will offer you the 14.5% guaranteed returns you would receive from paying down your mortgage to 80% LTV.
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BruceM
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Post by BruceM »

El Jefe wrote:
...effectively getting a return of 8.4%
I respectfully disagree with the above calculations.

My math could be wrong here, but you are basically holding two mortgages.

The first mortgage is $268,816, the LTV of 80%. On this you pay a 4.5% rate.

The second mortgage is the remaining of the principal balance, or $23,857. You also pay interest of 4.5% here. But additionally, you pay $181.44/month on this mortgage in insurance, which is a kind of interest. So your monthly "interest plus insurance" payment on this balance is $270.91 .

($270.91 ~= $181.44 + $89.47).

All told this is an effective interest rate of about 14.5% on the "second mortgage", i.e. the principal above 80% LTV.
My number is a little bit smaller....

The first month's interest plus PMI payment will indeed be (181.44+89.46) = 270.90. Divide by the > 80% LTV amount = 270.90/23,857 = 1.14%, annualized (X12) = 13.63%.

The actual (not annualized) interest paid the first year, assuming 12 payments = (181.44 X 12) + 1,065.69 (interest on first 12 months of a 30 year, 4.5% loan) = 3,242.97, divided by 23,857 loan = 13.59%. But this will decline gradually each year as the interest portion of the P&I declines.

Of course, this is gross of tax....but your point is a good one...this is expensive money.

BruceM
El Jefe
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Post by El Jefe »

= 1.14%, annualized (X12) = 13.63%.
Ah. I believe we actually agree on the monthly amount of 1.14%. The difference between our calculations is in how we convert this monthly interest amount to an annual number.

If calculated exactly, to the penny, annualized interest is NOT the monthly interest multiplied by twelve. Rather, annualized interest is the monthly interest compounding on itself every month.

Therefore, we must not multiply but rather use exponents:

1.14% to the twelfth demonstrates the compounding of interest on interest, in a monthly fashion, which is where I got my number of near 14.6%. (1.0114^12 = 1.14571181)

On small interest rates, like four or five percent per annum, the approximation rule of x12 you employed is pretty much the same as the monthly compounding method I employed.

But in cases where large interest rates are involved, like this one, the difference between the approximated method and the monthly compounding method is pretty meaningful.
but your point is a good one...this is expensive money.
Not to beat a dead horse... :wink:

Just pointing out that yes, it is VERY expensive money, tax deductions be damned.
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verbose
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Post by verbose »

You should call your lender before you do anything. You may not be eligible to remove PMI.

The 80% LTV benchmark is used to determine whether PMI applies to a new loan. The criteria for removing it from an existing loan is different.

I refinanced last year and went round and round on the issue. I refused to accept PMI. During one of the discussions, the lender told me that if the loan included PMI, it couldn't be removed during the first 3 years of the loan term, no matter what the LTV was. After that, I would have to pay the appraiser chosen by the lender to determine the property's value.
BillRogers
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Removing PMI

Post by BillRogers »

Hello AtDev,

There are two ways to remove the PMI without refinancing. One is passively done by the lender when your LTV is typically below 78% (may be different in your case) of the original purchase price of the home. This is required by law and the details should be stated on your contract. No appraisal is needed even if the home is worth less than the original purchase price.

The second method is to actively pay down your mortgage to 80% of the original purchase price of the home provided that it has not dropped in value from its original price. The lender will then require that you pay for an appraiser to confirm the current value of the home before they remove the PMI. If the house has dropped in value you will then be required to pay 20% of the difference between the new appraised value and the original price you paid for the home. If all these are met then the lender must remove the PMI insurance.

It may be prudent to get the appraisel before sending your money so that you know how much you will need to spend. I hope this posting was helpful.

Best wishes,
Bill
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Ilovevolleyball
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Post by Ilovevolleyball »

atDev wrote:
- the buyer(s) can't be patient to save before buying
We did not want to put down a large down payment due to wanting to keep some savings, so yes, we probably could have waited to save a bit more. Either way, the question concerns what to do now that we have PMI, not what we should have done :)
- the buyer(s) are buying a little too much home relative to their current situation.
The home is affordable for us. PMI was used because we did not have past year tax returns to really prove our financial situation. I had just started a successful business and we were not married yet.
- the buyer(s) can't save
We have about 300k in savings and are in our 20's.
- the buyer(s) are leveraged in other areas as well
- the buyer(s) believe that money can be used better for other purposes - which to me is other to buy more stuff or to invest in other assets that hopefully make more than the PMI loan.
Investing, but which is why I asked this question to see.

Also it is worth it to note that we can not deduct it on our return.
Great Post. Tactful, smart and mature.

Mike
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