Put equity in home or invest?

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Abarn
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Put equity in home or invest?

Post by Abarn » Tue Mar 19, 2019 10:10 am

Hello all. I currently have a little over 10% equity in my home and am paying $116 per month in private mortgage insurance. I am in the fortunate situation of having more of a cash reserve than I need right now. I'm wondering if it would be smarter to take this extra cash and pay down the mortgage and drop the PMI or take the extra cash and invest in my taxable account. My interest rate is 3.875%. Thanks in advance!

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ruralavalon
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Re: Put equity in home or invest?

Post by ruralavalon » Tue Mar 19, 2019 10:31 am

Abarn wrote:
Tue Mar 19, 2019 10:10 am
Hello all. I currently have a little over 10% equity in my home and am paying $116 per month in private mortgage insurance. I am in the fortunate situation of having more of a cash reserve than I need right now. I'm wondering if it would be smarter to take this extra cash and pay down the mortgage and drop the PMI or take the extra cash and invest in my taxable account. My interest rate is 3.875%. Thanks in advance!
It is probably better to pay down the mortgage note.

What is your tax bracket, both federal and state?

Will you be able to deduct the mortgage interest paid?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Quirkz
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Re: Put equity in home or invest?

Post by Quirkz » Tue Mar 19, 2019 10:59 am

Getting rid of PMI is usually a win, because it's wasted money from your perspective. That said, please read the wording carefully on how that process works with your loan. In a lot of cases it's phrased in a way that looks at first glance like it goes away when you hit a financial threshold, but the actual requirement is based on the date of when you would hit that threshold naturally, without extra payments. So it may not be as simple as "pay more and it'll just disappear automatically when I hit 20%". Sometimes you can get out with an appraisal, but I had to refinance to clear mine out.

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Abarn
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Re: Put equity in home or invest?

Post by Abarn » Tue Mar 19, 2019 12:50 pm

ruralavalon wrote:
Tue Mar 19, 2019 10:31 am
Abarn wrote:
Tue Mar 19, 2019 10:10 am
Hello all. I currently have a little over 10% equity in my home and am paying $116 per month in private mortgage insurance. I am in the fortunate situation of having more of a cash reserve than I need right now. I'm wondering if it would be smarter to take this extra cash and pay down the mortgage and drop the PMI or take the extra cash and invest in my taxable account. My interest rate is 3.875%. Thanks in advance!
It is probably better to pay down the mortgage note.

What is your tax bracket, both federal and state?

Will you be able to deduct the mortgage interest paid?
My federal tax bracket is 35% and state is 6.84%. I believe I am able to deduct the mortgage interest paid. Thank you!

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willthrill81
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Re: Put equity in home or invest?

Post by willthrill81 » Tue Mar 19, 2019 12:54 pm

Quirkz wrote:
Tue Mar 19, 2019 10:59 am
Getting rid of PMI is usually a win, because it's wasted money from your perspective. That said, please read the wording carefully on how that process works with your loan. In a lot of cases it's phrased in a way that looks at first glance like it goes away when you hit a financial threshold, but the actual requirement is based on the date of when you would hit that threshold naturally, without extra payments. So it may not be as simple as "pay more and it'll just disappear automatically when I hit 20%". Sometimes you can get out with an appraisal, but I had to refinance to clear mine out.
:thumbsup

There is a lot of variation among lenders on whether/how they will remove PMI. Sometimes it comes off automatically when you reach 20% LTV, some require that you request in writing that they remove it after you hit 20% LTV, and in some cases it's there for the life of the loan (i.e. you must refinance to get rid of it). Some will base the LTV on the originally appraised value of the property, and some want a new appraisal that you must pay for yourself.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Topic Author
Abarn
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Re: Put equity in home or invest?

Post by Abarn » Tue Mar 19, 2019 12:56 pm

Quirkz wrote:
Tue Mar 19, 2019 10:59 am
Getting rid of PMI is usually a win, because it's wasted money from your perspective. That said, please read the wording carefully on how that process works with your loan. In a lot of cases it's phrased in a way that looks at first glance like it goes away when you hit a financial threshold, but the actual requirement is based on the date of when you would hit that threshold naturally, without extra payments. So it may not be as simple as "pay more and it'll just disappear automatically when I hit 20%". Sometimes you can get out with an appraisal, but I had to refinance to clear mine out.
Thank you, these are very good points. I just discussed this with my mortgage guy and I have to pay down to 78% of the purchase price of my home in order to have the PMI dropped. Now, the appraised value is higher than what I purchased the home for and if I want to drop the PMI prior to reaching 78% LTV I would have to get the home re-appraised (and pay for it). I'm really wishing I just put the 20% down to begin with but hindsight is 20/15.

delamer
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Re: Put equity in home or invest?

Post by delamer » Tue Mar 19, 2019 12:58 pm

How long have you had the mortgage?

Any chance that a no-cost refi would be an option?

ohai
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Re: Put equity in home or invest?

Post by ohai » Tue Mar 19, 2019 1:15 pm

Assuming you deduct your full mortgage interest for Federal taxes, you are paying 2.52% after tax. Plus PMI, what is this? 3.00% after tax? Let's say you pay 15% capital gains tax. So, that 3.00% is 3.53% before tax. Can you invest for better than 3.53%? If so, don't pay off the mortgage. Maybe my assumptions are not correct, adjust as needed.

J295
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Re: Put equity in home or invest?

Post by J295 » Tue Mar 19, 2019 2:15 pm

Broadly speaking, I'm in the camp of no debt. So, we paid off our home asap and only purchased cars with cash. Others are fine with debt and investing rather than paying down. Just not my cup of tea. This assumes you fully fund retirement, HSA if applicable, etc.

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grabiner
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Re: Put equity in home or invest?

Post by grabiner » Tue Mar 19, 2019 8:29 pm

ohai wrote:
Tue Mar 19, 2019 1:15 pm
Assuming you deduct your full mortgage interest for Federal taxes, you are paying 2.52% after tax. Plus PMI, what is this? 3.00% after tax? Let's say you pay 15% capital gains tax. So, that 3.00% is 3.53% before tax. Can you invest for better than 3.53%? If so, don't pay off the mortgage. Maybe my assumptions are not correct, adjust as needed.
This is not correct, for two reasons.

The more important argument is that you are comparing the risk-free return of paying down a mortgage to the returns of riskier investments. You can earn more, with more risk, by buying stock rather than paying down your mortgage; however, you can also do this by paying down the mortgage, and moving an equal amount from bonds to stock in your 401(k). The fair comparison is between mortgage rates and the returns on low-risk bonds. The OP could earn 2,74% on Admiral shares of Vanguard Long-Term Tax-Exempt, which is more than the after-tax rate on the mortgage; therefore, it would be a small net loss to pay down the mortgage, except for the PMI. (You don't need to invest in this fund, but it is the closest to a fair comparison.)

The other issue is that the PMI is not prorated over the entire mortgage. If the PMI is 0.5% of the principal, this doesn't increase the whole mortgage rate by 0.5%. If paying off 1/8 of the principal eliminates the PMI, then the return from paying the mortgage down by that amount is 7.875%, and the return from paying it down any further is 3.875%.

Thus it is a clear decision to get rid of the PMI, assuming that this is possible under the loan terms. (With some loans, the PMI does not go away until you reach 80% LTV under the original amortization scheduled; if that is the case, you would have to refinance to get rid of PMI.)
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bdpb
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Re: Put equity in home or invest?

Post by bdpb » Tue Mar 19, 2019 11:23 pm

Abarn wrote:
Tue Mar 19, 2019 12:50 pm
My federal tax bracket is 35% and state is 6.84%. I believe I am able to deduct the mortgage interest paid. Thank you!
Is all your interest deductible above the standard deduction? SaLT deductions are limited, now.

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ruralavalon
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Re: Put equity in home or invest?

Post by ruralavalon » Wed Mar 20, 2019 9:07 am

Abarn wrote:
Tue Mar 19, 2019 12:50 pm
ruralavalon wrote:
Tue Mar 19, 2019 10:31 am
Abarn wrote:
Tue Mar 19, 2019 10:10 am
Hello all. I currently have a little over 10% equity in my home and am paying $116 per month in private mortgage insurance. I am in the fortunate situation of having more of a cash reserve than I need right now. I'm wondering if it would be smarter to take this extra cash and pay down the mortgage and drop the PMI or take the extra cash and invest in my taxable account. My interest rate is 3.875%. Thanks in advance!
It is probably better to pay down the mortgage note.

What is your tax bracket, both federal and state?

Will you be able to deduct the mortgage interest paid?
My federal tax bracket is 35% and state is 6.84%. I believe I am able to deduct the mortgage interest paid. Thank you!
I agree with grabiner
grabiner wrote:
Tue Mar 19, 2019 8:29 pm
Thus it is a clear decision to get rid of the PMI, assuming that this is possible under the loan terms. (With some loans, the PMI does not go away until you reach 80% LTV under the original amortization scheduled; if that is the case, you would have to refinance to get rid of PMI.)Thus it is a clear decision to get rid of the PMI, assuming that this is possible under the loan terms. (With some loans, the PMI does not go away until you reach 80% LTV under the original amortization scheduled; if that is the case, you would have to refinance to get rid of PMI.)
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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grabiner
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Re: Put equity in home or invest?

Post by grabiner » Wed Mar 20, 2019 9:04 pm

bdpb wrote:
Tue Mar 19, 2019 11:23 pm
Abarn wrote:
Tue Mar 19, 2019 12:50 pm
My federal tax bracket is 35% and state is 6.84%. I believe I am able to deduct the mortgage interest paid. Thank you!
Is all your interest deductible above the standard deduction? SaLT deductions are limited, now.
Even if your mortgage is only partially deductible, you cannot get the benefit of eliminating the non-deductible interest unless you pay down enough to get rid of all the deductible interest. Therefore, unless you are just barely itemizing, the benefit from a paydown is likely to be the same whether all or part of the interest is deductible.
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bdpb
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Re: Put equity in home or invest?

Post by bdpb » Thu Mar 21, 2019 3:25 pm

grabiner wrote:
Wed Mar 20, 2019 9:04 pm
bdpb wrote:
Tue Mar 19, 2019 11:23 pm
Abarn wrote:
Tue Mar 19, 2019 12:50 pm
My federal tax bracket is 35% and state is 6.84%. I believe I am able to deduct the mortgage interest paid. Thank you!
Is all your interest deductible above the standard deduction? SaLT deductions are limited, now.
Even if your mortgage is only partially deductible, you cannot get the benefit of eliminating the non-deductible interest unless you pay down enough to get rid of all the deductible interest. Therefore, unless you are just barely itemizing, the benefit from a paydown is likely to be the same whether all or part of the interest is deductible.
Agreed.

I should have been more clear. My point applies to the after tax calculations comparison. It was just an FYI, that with the higher standard deduction and limited SaLT deductions the best case (all interest deductible) is not true as nearly often as it used to be.

JonSnow
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Re: Put equity in home or invest?

Post by JonSnow » Thu Mar 21, 2019 7:02 pm

I did and would do it again in a heartbeat. Search for my post of you want some more reading that could help your decision.

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