Huge mortgage mistake

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sergio
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Huge mortgage mistake

Post by sergio » Wed Aug 08, 2018 10:35 pm

I closed on a townhouse 2 months ago. We bought a place pretty much on the absolute low end of our price range. Super happy with the place.

I'm going to spare the details of the flawed thought process I used, but I ended in taking a 30 year mortgage at 4.5% with $60/month PMI (0.35 points). I took the 30 year to be safe and only put down 5% to keep a huge emergency fund.

Now that the stress of Buying a first home has passed, I am kicking myself. Even under the current terms I can probably pay this off in 10 years, maybe less. I am clueless how I can proceed (refinance?) to get a lower rate and get rid of the PMI.

I don't qualify for the mortgage interest deduction, which makes this even worse , so I really want to get this paid off asap with as little interest as possible. I was way too conservative as the whole experience stressed me out more than I thought.

delamer
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Re: Huge mortgage mistake

Post by delamer » Wed Aug 08, 2018 10:53 pm

Are you willling to put more cash into the house?

goblue100
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Re: Huge mortgage mistake

Post by goblue100 » Wed Aug 08, 2018 10:53 pm

I believe if it is a conventional loan, PMI goes away when you have 20% equity:
https://www.bankrate.com/finance/mortga ... rance.aspx
To remove PMI, or private mortgage insurance, you must have at least 20 percent equity in the home. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80 percent of the home’s original appraised value. When the balance drops to 78 percent, the mortgage servicer is required to eliminate PMI.
If it is an FHA loan, you have to refinance to get rid of insurance.
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masha12
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Re: Huge mortgage mistake

Post by masha12 » Wed Aug 08, 2018 10:58 pm

If you refinanced to a 15-year mortgage, what would the rate be? If you put 20% down, how much of an emergency fund would you have left? Could you prepay your mortgage to get rid of PMI?

Even without knowing the answers to these questions, you didn't make a "huge" mistake. I'm not even sure you made a "mistake." In the history of mortgage rates, 4.5% is not ridiculous. And while paying PMI is not the smartest thing in the world, you apparently have enough in savings to avoid paying it. Don't beat yourself up over it.

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wabbajack
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Re: Huge mortgage mistake

Post by wabbajack » Wed Aug 08, 2018 10:59 pm

Closed on my first house 3 months ago. 30 year mortgage at 4.625% with 15% down, so I am paying some PMI. I considered making a 15-year, but the math would not work out with my emergency savings. My income is high relative to the price of the house, so in a couple of years I will have the option to start paying it down more quickly to save on interest.

However, I ran the math and it didn't make sense for me to do that for various reasons:
  • I plan on staying for 5-8 years. If you know that you will be selling at some point, you want as little equity tied up as possible.
  • Refinancing incurs a whole other origination cost and additional paperwork hassle
  • Can you commit to refi 15-years (higher payments)? This saves some interest, but so does making larger monthly payments to a 30-year mortgage (i.e. treating it like a 15-year mortgage)
  • My emergency fund was light. It is about 80% of where it needs to be now, but should be fine by the end of this year. You don't mention how big of a fund you have - it might not be as big as you think.
  • Most importantly, this is your first house. There's going to be all kinds of things you're going to start paying for. If you had a home inspection report, start from there and try to work out how much $ you'll need to set aside to fix stuff. Think water heater, HVAC, chimney cleaning, appliances like lawn mowers, etc. My first hand experience - that stuff adds up quick.
How sound of financial footing are you? Could you afford to put towards the mortgage principle and how sure are you that you won't need that money soon?

sergio
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Re: Huge mortgage mistake

Post by sergio » Wed Aug 08, 2018 11:08 pm

I am willing to put more cash into this place. I'm not planning on moving for a long time. Of course, things can change, but we did not buy this place with the intent to move in a few years.

PMI doesn't go away automatically until 2027, which is when I am schedule to pay off 22% of the lon under the original amortization schedule. At 20% equity I could request it but I've heard tons of horror stories and people getting jerked along, appraisals that come in low etc.

Even worse, I now remember I could've put down 10% rather than 5%, and PMI would've been $35/month which wouldn't bother me as much. Ugh. Just seems I did everything wrong looking back.

I guess one upside to the small down payment is we had a good amount of money to update the place before moving in.
Last edited by sergio on Wed Aug 08, 2018 11:13 pm, edited 1 time in total.

MnD
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Re: Huge mortgage mistake

Post by MnD » Wed Aug 08, 2018 11:10 pm

Not a huge mistake. You can pay extra right now so the loan pays off in 10 years or less.
When you are sure you have 20% equity you can refinance or contact your lender and pay for an appraisal to get rid of the PMI. If between now and refinancing and/or ditching PMI something bad happens to your finances you will be glad you made this mistake.
I made the same mistake 27 years ago and have hit and exceeded all my financial goals. Just a little bump in the road.

sergio
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Re: Huge mortgage mistake

Post by sergio » Wed Aug 08, 2018 11:13 pm

wabbajack wrote:
Wed Aug 08, 2018 10:59 pm
Closed on my first house 3 months ago. 30 year mortgage at 4.625% with 15% down, so I am paying some PMI. I considered making a 15-year, but the math would not work out with my emergency savings. My income is high relative to the price of the house, so in a couple of years I will have the option to start paying it down more quickly to save on interest.

However, I ran the math and it didn't make sense for me to do that for various reasons:
  • I plan on staying for 5-8 years. If you know that you will be selling at some point, you want as little equity tied up as possible.
  • Refinancing incurs a whole other origination cost and additional paperwork hassle
  • Can you commit to refi 15-years (higher payments)? This saves some interest, but so does making larger monthly payments to a 30-year mortgage (i.e. treating it like a 15-year mortgage)
  • My emergency fund was light. It is about 80% of where it needs to be now, but should be fine by the end of this year. You don't mention how big of a fund you have - it might not be as big as you think.
  • Most importantly, this is your first house. There's going to be all kinds of things you're going to start paying for. If you had a home inspection report, start from there and try to work out how much $ you'll need to set aside to fix stuff. Think water heater, HVAC, chimney cleaning, appliances like lawn mowers, etc. My first hand experience - that stuff adds up quick.
How sound of financial footing are you? Could you afford to put towards the mortgage principle and how sure are you that you won't need that money soon?
Despite being 50 years old, the place has new well maintained mechanicals, a new roof, new deck etc.(previous owner was an older lady who documented EVERYTHING) and the HOA handles all exterior work.

I'm making the 15yr payment on the 30yr loan easily.

123
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Re: Huge mortgage mistake

Post by 123 » Wed Aug 08, 2018 11:13 pm

sergio wrote:
Wed Aug 08, 2018 11:08 pm
... Just seems I did everything wrong looking back....
I've felt this way more than once about a number of things (not all financial). Live and learn. We all do it.
The closest helping hand is at the end of your own arm.

gwrvmd
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Re: Huge mortgage mistake

Post by gwrvmd » Wed Aug 08, 2018 11:23 pm

Make extra principal payments ($500 or $1,000) as often as possible. Not extra mortgage payments, make specifically principal payments. When you get the principal down to 80% of the original mortgage apply to drop the PMI.....Gordon
Disciple of John Neff

limeyx
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Re: Huge mortgage mistake

Post by limeyx » Wed Aug 08, 2018 11:30 pm

sergio wrote:
Wed Aug 08, 2018 11:08 pm
I am willing to put more cash into this place. I'm not planning on moving for a long time. Of course, things can change, but we did not buy this place with the intent to move in a few years.

PMI doesn't go away automatically until 2027, which is when I am schedule to pay off 22% of the lon under the original amortization schedule. At 20% equity I could request it but I've heard tons of horror stories and people getting jerked along, appraisals that come in low etc.

Even worse, I now remember I could've put down 10% rather than 5%, and PMI would've been $35/month which wouldn't bother me as much. Ugh. Just seems I did everything wrong looking back.

I guess one upside to the small down payment is we had a good amount of money to update the place before moving in.
Why not pre-pay to 20% and if they give you hassle about removing PMI just go to another mortgage broker and re-finance ? There are a million out there who will take your business.

Dottie57
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Re: Huge mortgage mistake

Post by Dottie57 » Wed Aug 08, 2018 11:37 pm

MnD wrote:
Wed Aug 08, 2018 11:10 pm
Not a huge mistake. You can pay extra right now so the loan pays off in 10 years or less.
When you are sure you have 20% equity you can refinance or contact your lender and pay for an appraisal to get rid of the PMI. If between now and refinancing and/or ditching PMI something bad happens to your finances you will be glad you made this mistake.
I made the same mistake 27 years ago and have hit and exceeded all my financial goals. Just a little bump in the road.
This. Just pay extra each month and make sure it is applied to the principal. It will make a large difference.

srt7
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Re: Huge mortgage mistake

Post by srt7 » Wed Aug 08, 2018 11:38 pm

I don't get it. I can't even see the mistake here let alone a "huge" one. It's really very simple ... this mortgage process. You want your lender to have more skin in the game while you want to lower your risk and hold on to your cash? Fine, pay a PMI (lender's insurance). Want better interest rates? Go with lower terms.

Me thinks what you're experiencing is called "buyer's remorse". Give it sometime and it'll go away.
I can't think of anything more luxurious than owning my time. - remomnyc

mdavis6890
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Re: Huge mortgage mistake

Post by mdavis6890 » Wed Aug 08, 2018 11:47 pm

Don't sweat it. Sounds like you have enough to put 20% down. Just refi into a new 10/1 adjustable (that is, fixed for 10 years, then adjustable yearly after that, with a 30-year total amortization) with 20% down and you're good to go. It's a bit of hassle, but there's no rush about it or other pressure since you already have the house.

Since you might pay this off in 10 years, you might well never have to worry about the adjustment. And even if you still have a bit left, you can always refi again to get your payments back down at that point.

RL1013
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Re: Huge mortgage mistake

Post by RL1013 » Thu Aug 09, 2018 12:12 am

Sometimes the refi cost is not worth it. Imagine that you did a refi and make that additional payment each month. If the savings from refi is not substantial, I would just pour in extra payments. If you hit the LTV required to cancel PMI, just call up your lender and ask them to cancel. I have recasted my loan after paying 20000 extra over a period of 19 months. Now my monthly payment shrinked by around $140 which goes as "additional" additional payment to principle. I am planning to repeat this strategy every 2 years or so.

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celia
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Re: Huge mortgage mistake

Post by celia » Thu Aug 09, 2018 1:05 am

What is the mistake?

The 30-year loan is advantageous if you should want/need to live on one income sometime during the life of the loan. (Life happens and you never know when you will be out of work. DH and I were laid off at the same time for a year and survived by having lower mortgage payments.) But it would be even better if you could get rid of the PMI insurance by applying extra payments to the principal early in the loan.

fishmonger
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Re: Huge mortgage mistake

Post by fishmonger » Thu Aug 09, 2018 7:26 am

$60/month is not a huge mistake. A huge mistake would be taking a 5/1 ARM to be "able to afford the payment" on a place you have no business buying

Sportswhiz00
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Re: Huge mortgage mistake

Post by Sportswhiz00 » Thu Aug 09, 2018 7:30 am

OP, it’s easy to refinance with low or no costs and basically just a phone call and signature. Try for example guaranteed rate (their website shows you rates and costs - you get no closing cost cost loans for a slightly higher rate).

The only thing you will have lost is the closing costs you paid for your last mortgage, but that’s a sunk cost at this point anyway.

stan1
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Re: Huge mortgage mistake

Post by stan1 » Thu Aug 09, 2018 7:34 am

Easy to do a refi to a 15 or 20 year loan if you want, or just make some extra payments to principal. You didn't make a huge mistake so don't beat yourself up over this.

Miguelito
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Re: Huge mortgage mistake

Post by Miguelito » Thu Aug 09, 2018 7:46 am

I am wondering what made you change your mind so quickly. As a BH, I'd imagine you understand personal finance at least reasonably well.

Something (objective or subjective) made you feel you needed that big down payment and the lower monthly mortgage when, it appears, you could have afforded to do things differently. What was it?

To me, the 30-year mortgage is not the big deal, but paying PMI is.

When we bought our house years ago (right after wedding - very young) we did VERY un-BH things and borrowed from family/401k to get to the 10% down so we could do a 10/10/80 and not pay PMI. We had no EF. We aggressively paid everyone back in a few months, and then the other 10% off a few years later. Then we refinanced to 15-year when rates dropped.

Fast forward a few more years, and when we moved to our current home we had not yet sold the last one, so we had to carry two mortgages and could not get approved for yet another 15-year mortgage (these houses were not cheap). We had enough for the full 20% down payment (once again with 401k loans), but had to take a 30-year mortgage on the new house. After two months, the other house was sold, we repaid all loans back, and did the paperwork to change the new mortgage to a 15-year mortgage. Rate dropped from 4.25% to 2.99%. I had to pay $4k in fees to do that, but my ROI on that was only a few months. We now have had that fixed 2.99% rate for several years. I'm not pre-paying that. Glad I made that move too since, with the tax changes, the move looks even better.

daheld
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Re: Huge mortgage mistake

Post by daheld » Thu Aug 09, 2018 8:36 am

I'm not intimately familiar with every step of the process, but I thought when your remaining balance hits 78% of the original they are required to remove PMI? If you have a ton of cash sitting around, just make a lump sum payment against principal and PMI should be gone. There's probably a formal request you have to do, but I don't think it's a big deal.

Historically, 4.5% is not a terrible rate. If you can pay it off early, just do it. Eliminate PMI with a lump sum, then pay ahead monthly.

cusetownusa
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Re: Huge mortgage mistake

Post by cusetownusa » Thu Aug 09, 2018 9:04 am

Seems like a simple solution to me...just pay down your mortgage principal to 78% of the original purchase price and your mortgage lender should remove PMI. That's what I did.

Like you I only put 5% down on my house because I wasn't sure how long I would be able to sell the house that I was moving from and wanted to make sure I had enough liquidity just in case I had to pay 2 mortgages for an extended period of time. Once I sold that house I just dumped enough money into the principal to bring it down to 78% of my purchase price. Worked just as planned.

Mike Scott
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Re: Huge mortgage mistake

Post by Mike Scott » Thu Aug 09, 2018 9:47 am

Have you asked your mortgage holder what your/their options are? It might be as simple as writing a check for an amount to buy out to 80% or it might require a refinance. If your current lender does not want to do anything for you, there are many others who would be happy to give you a quote.

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220volt
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Re: Huge mortgage mistake

Post by 220volt » Thu Aug 09, 2018 9:52 am

Honestly, $60/month for PMI is nothing. I would just put more automatically towards principle every month and pay that thing off in 10-15 years. It will get rid of your PMI quicker too.
Refinancing introduces not only stress but additional cost. Is that worth $60/month?
"If I had only followed the advice of financial analysts in 2008, I'd have a million dollars today, provided I started with a hundred million dollars" - Jon Stewart

mptfan
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Re: Huge mortgage mistake

Post by mptfan » Thu Aug 09, 2018 10:04 am

goblue100 wrote:
Wed Aug 08, 2018 10:53 pm
I believe if it is a conventional loan, PMI goes away when you have 20% equity...
I don't mean to pick nits, but having 20% equity is not exactly the same thing as the "mortgage balance falling below 80% of the home's original appraised value." If the value of the home goes up, you can get to 20% equity before the mortgage balance falls below 80% of the original appraised value.

barnaclebob
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Re: Huge mortgage mistake

Post by barnaclebob » Thu Aug 09, 2018 10:10 am

You didn't make a huge mistake, you are looking at a couple thousand dollar mistake at worst. You need to evaluate whether its worth it to refinance into a lower rate and pay the fees with the refi or to just pay the extra PMI and higher rate for the 10 years it will take you to pay it off.

My philosophy for when trying to decide between a refi at 30 years with a higher rate and paying extra towards principle vs a 15 year with a lower rate and not having a lot of margin for a few years in case of a job loss was to "optimize for the best or most likley scenario but have a backup plan for the worst." We went with the 15 year and didn't regret it.
Last edited by barnaclebob on Thu Aug 09, 2018 10:14 am, edited 3 times in total.

sergio
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Re: Huge mortgage mistake

Post by sergio » Thu Aug 09, 2018 10:10 am

cusetownusa wrote:
Thu Aug 09, 2018 9:04 am
Seems like a simple solution to me...just pay down your mortgage principal to 78% of the original purchase price and your mortgage lender should remove PMI. That's what I did.

Like you I only put 5% down on my house because I wasn't sure how long I would be able to sell the house that I was moving from and wanted to make sure I had enough liquidity just in case I had to pay 2 mortgages for an extended period of time. Once I sold that house I just dumped enough money into the principal to bring it down to 78% of my purchase price. Worked just as planned.
According to the PMI agreement, PMI will automatically be cancelled when the balance is originally scheduled to fall to 78%, which is in 2027. At 80% equity I can request that PMI be cancelled.

Is there any benefit just paying down an extra 15% and changing to a 15-year mortgage, or would that basically require a refinance at this point?

daheld
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Re: Huge mortgage mistake

Post by daheld » Thu Aug 09, 2018 10:38 am

sergio wrote:
Thu Aug 09, 2018 10:10 am
cusetownusa wrote:
Thu Aug 09, 2018 9:04 am
Seems like a simple solution to me...just pay down your mortgage principal to 78% of the original purchase price and your mortgage lender should remove PMI. That's what I did.

Like you I only put 5% down on my house because I wasn't sure how long I would be able to sell the house that I was moving from and wanted to make sure I had enough liquidity just in case I had to pay 2 mortgages for an extended period of time. Once I sold that house I just dumped enough money into the principal to bring it down to 78% of my purchase price. Worked just as planned.
According to the PMI agreement, PMI will automatically be cancelled when the balance is originally scheduled to fall to 78%, which is in 2027. At 80% equity I can request that PMI be cancelled.

Is there any benefit just paying down an extra 15% and changing to a 15-year mortgage, or would that basically require a refinance at this point?
That requires a new loan. Yes, you'd have a different rate, assuming rates changed. You say you have a "huge emergency fund". Why? Just make a lump sum payment that gets you to 22% of principal and PMI goes away. It's not complicated.

mouses
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Re: Huge mortgage mistake

Post by mouses » Thu Aug 09, 2018 10:45 am

I haven't had time to read all the replies, but OP, can you not just pay more each month so you pay it off early? What does the contract say about paying extra, is that allowed?

ryman554
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Re: Huge mortgage mistake

Post by ryman554 » Thu Aug 09, 2018 10:59 am

RL1013 wrote:
Thu Aug 09, 2018 12:12 am
I have recasted my loan after paying 20000 extra over a period of 19 months. Now my monthly payment shrinked by around $140 which goes as "additional" additional payment to principle. I am planning to repeat this strategy every 2 years or so.
What you are doing is not necessary, at best, and counter-productive, at worst, if your recasting costs you any $$.

Recasting is only necessary if you foresee the need for increased cash flow monthly. It changes the amortization table, but not the interest rate. Regardless of recasting, you will pay the same interest monthly on your outstanding balance.

If you don't believe me, run two mortgage calculations.

#1 is your original mortage with the additional pre-payments.
#2 is your original mortgage through month 19 with pre-payments. Then a recast for 360-19 months using the balance and do new monthly payment with the reduction in PITI, but with increased pre-payment.

You end up at the same place at the same time as long as you pay the same total amount to the bank each month.

Again, the recast is great insurance for being house rich -- reduces minimum monthly obligations in case of emergency -- but is not a way to payoff mortgages faster.

Texanbybirth
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Re: Huge mortgage mistake

Post by Texanbybirth » Thu Aug 09, 2018 11:09 am

Is the reason you didn't put 20% down because if you did you wouldn't have an adequate emergency fund - say 3-6-12 months expenses? If so, maybe you did bite off a bit more than you can chew, and you shouldn't just burn through all your cash renovating/paying down early.

If that's not the reason, and you really were just stressed about the situation, then speak with the lender about ways to get rid of the PMI early. That could mean leaving them by doing a refi. Shoot you could even refit into another 30-yr if you like the convenience of the smaller payments (will be even smaller if you put down 20%!) if your financial picture gets bad. I don't really understand the "horror stories" comment. Those situations probably don't apply to you and your lender. You've got a (long) contract with them, just review it rationally now that you're not so emotional about the whole loan process.

$60/mo is probably nothing to lose sleep over, but it would motivate me to take care of this issue quickly if I were you. Good luck! :sharebeer

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wabbajack
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Re: Huge mortgage mistake

Post by wabbajack » Thu Aug 09, 2018 11:25 am

Did you evaluate how much PMI you are paying relative to the downpayment (~15%) you need to make? Your money has an opportunity cost of making a return somewhere else or being a cushion for unexpected life events. I'd caution against making any lump sum payment towards your principle just yet. Give it another month and if no large house expenses come up.

cusetownusa
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Re: Huge mortgage mistake

Post by cusetownusa » Thu Aug 09, 2018 12:36 pm

sergio wrote:
Thu Aug 09, 2018 10:10 am
cusetownusa wrote:
Thu Aug 09, 2018 9:04 am
Seems like a simple solution to me...just pay down your mortgage principal to 78% of the original purchase price and your mortgage lender should remove PMI. That's what I did.

Like you I only put 5% down on my house because I wasn't sure how long I would be able to sell the house that I was moving from and wanted to make sure I had enough liquidity just in case I had to pay 2 mortgages for an extended period of time. Once I sold that house I just dumped enough money into the principal to bring it down to 78% of my purchase price. Worked just as planned.
According to the PMI agreement, PMI will automatically be cancelled when the balance is originally scheduled to fall to 78%, which is in 2027. At 80% equity I can request that PMI be cancelled.

Is there any benefit just paying down an extra 15% and changing to a 15-year mortgage, or would that basically require a refinance at this point?

That would require a refinance.

At 80% of home value you can request it to be removed (ie either by making extra principal payments or by home increasing in value or combination thereof) however they would probably require a home appraisal.

However, at least based on my experience, once you hit 78% of original purchase price they will remove the pmi (you will most likely need to request it if you hit 78% ahead of schedule, ie make extra principal payments).

When they say “as originally scheduled” I think they just mean that it will automatically be removed. If you hit it by paying extra then you will need to request it. Just make a call and I am sure they can answer it for you.

Saving$
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Re: Huge mortgage mistake

Post by Saving$ » Thu Aug 09, 2018 12:56 pm

At this point:
1. Keep sufficient emergency fund
2. Fully fund retirement accounts and HSA (401k/Roth, etc)
3. Use extra to pay down mortgage
4. When mortgage balance reaches 78% of purchase price, request dropping PMI.
5. If lender requires re-appraisal to drop PMI, run the numbers to see it cost of appraisal is more or less than refi (I've done several no cost refis), and go with lower cost option.
If lender refuses to drop PMI until scheduled date, run the numbers to see how much a refi will cost, vs how much you would save over planned duration of mortgage and proceed accordingly.

6. Enjoy new home

tesuzuki2002
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Re: Huge mortgage mistake

Post by tesuzuki2002 » Thu Aug 09, 2018 4:29 pm

sergio wrote:
Wed Aug 08, 2018 10:35 pm
I closed on a townhouse 2 months ago. We bought a place pretty much on the absolute low end of our price range. Super happy with the place.

I'm going to spare the details of the flawed thought process I used, but I ended in taking a 30 year mortgage at 4.5% with $60/month PMI (0.35 points). I took the 30 year to be safe and only put down 5% to keep a huge emergency fund.

Now that the stress of Buying a first home has passed, I am kicking myself. Even under the current terms I can probably pay this off in 10 years, maybe less. I am clueless how I can proceed (refinance?) to get a lower rate and get rid of the PMI.

I don't qualify for the mortgage interest deduction, which makes this even worse , so I really want to get this paid off asap with as little interest as possible. I was way too conservative as the whole experience stressed me out more than I thought.
Ask the bank about your 78% level and pay that much to get PMI to go away... then make as big of payment as you want/ can to get it paid off on your terms!

SDBoggled
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Re: Huge mortgage mistake

Post by SDBoggled » Thu Aug 09, 2018 8:32 pm

Hi,

Quite a few others have suggested paying down the mortgage to the level that PMI stops. Perhaps you don't realize you should be able to pay a lump sum off your mortgage at any time with no penalty (obviously have to check mortgage).

Once you decide how much cash you want to contribute to the mortgage paydown, then I think the decision is just math as to whether you want to refi with attendant costs and perhaps lower interest rate or stay with current mortgage, eliminating PMI and paying at an accelerated schedule???

Bogle_Bro
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Re: Huge mortgage mistake

Post by Bogle_Bro » Thu Aug 09, 2018 8:53 pm

They are obligated to remove the pmi at 78% ltv and 24 pmi payments if you request it

Think of it as a 70 * 24 = 1680 finance charge to buy a home with 5% down

Not a big deal.

RL1013
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Re: Huge mortgage mistake

Post by RL1013 » Thu Aug 09, 2018 9:36 pm

ryman554 wrote:
Thu Aug 09, 2018 10:59 am
RL1013 wrote:
Thu Aug 09, 2018 12:12 am
I have recasted my loan after paying 20000 extra over a period of 19 months. Now my monthly payment shrinked by around $140 which goes as "additional" additional payment to principle. I am planning to repeat this strategy every 2 years or so.
What you are doing is not necessary, at best, and counter-productive, at worst, if your recasting costs you any $$.

Recasting is only necessary if you foresee the need for increased cash flow monthly. It changes the amortization table, but not the interest rate. Regardless of recasting, you will pay the same interest monthly on your outstanding balance.

If you don't believe me, run two mortgage calculations.

#1 is your original mortage with the additional pre-payments.
#2 is your original mortgage through month 19 with pre-payments. Then a recast for 360-19 months using the balance and do new monthly payment with the reduction in PITI, but with increased pre-payment.

You end up at the same place at the same time as long as you pay the same total amount to the bank each month.

Again, the recast is great insurance for being house rich -- reduces minimum monthly obligations in case of emergency -- but is not a way to payoff mortgages faster.
Didn't have to pay anything for recast. I am aware that the terms will change. Primary objective is to increase cash flow. But if you repeat the recast strategy until payoff, you will definitely pay the loan faster. If you compare with direct additional payment without recasting, you are correct in stating that you will save a small amount in interest. But the additional cash flow for me is worth it. Might not work for everyone.

Beehave
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Re: Huge mortgage mistake

Post by Beehave » Thu Aug 09, 2018 9:46 pm

If there's a big inflation you can laugh all the way to the bank with your "huge mistake" which will have become a big plus. If there's a big deflation refinance for a much lower rate. If things stay as they are, enjoy the fact that you are living below your means and setting yourself up for a solid future. You learn from your experiences, including mistakes and things you think were mistakes that end up being no big deal.
Enjoy your new home and be happy that it is affordable for you!
Best wishes.

CurlyDave
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Re: Huge mortgage mistake

Post by CurlyDave » Fri Aug 10, 2018 1:38 am

Quit worrying about $60/month ($720/year).

I have made mistakes that cost a lot more than $720 in just one week, and life went on.

We can not be perfect in all things. And, as many have pointed out, this may actually be a big plus.

ryman554
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Re: Huge mortgage mistake

Post by ryman554 » Fri Aug 10, 2018 9:13 am

RL1013 wrote:
Thu Aug 09, 2018 9:36 pm
Didn't have to pay anything for recast. I am aware that the terms will change. Primary objective is to increase cash flow.
Then recasting provides some benefit. Notice that there are usually nominal $x00 fees (mine is $250) to recast, so the choice to do so is really driven by a perceived need to unlock "free cash flow" after a substantial pre-payment. I suggest one only use it when faced with a pending large emergency. Putting all of your emergency fund (for example) into home equity is a bad idea.
But if you repeat the recast strategy until payoff, you will definitely pay the loan faster. If you compare with direct additional payment without recasting, you are correct in stating that you will save a small amount in interest.
This statement is patently incorrect, and you misread my statement. Nowhere did I say you save any interest when you recast. In fact, I said you save absolutely zero interest (and do not accelerate your payoff in any way) when you do so, as long as you pay the same amount every month. Lets do the calculation, shall we?

Scenario:
30 year, 100k loan, 4% interest rate, pre-pay 10k at the one year mark.
Monthly payment = 477.42
Total interest paid over the life of the loan (no pre-payment): $ 71,867.97

At one year (after pre-payment!)
Loan balance after 12 payments = 98,238.91 , so 88,238.91 including extra 10k.
Total interest paid = 3,967.95 at the 12 month mark.
Because of the prepayment, you will payoff the loan 60 months early.
Total interest paid over the life of the loan (with pre-payment): $ 53,071.57 , Total interest saved: $ 18,796.40
You still have to pay $49103.62 in interest in the next 24 years.

Option 1: recast and reduce mortgage payment:
New loan term:
29 year, $88,238.96 @4%. Note, this extends the loan back to the original 30 year timeline.
New monthly payment is 428.82 ($48.60 / month less!)
Total interest paid = $60,988.73 -- wait, that's $11885.11 more interest than I would have paid had I not recasted? Why? Because my payment per month is less, so there is more principal left each month to accrue interest. Let's pay the original mortgage payment

Option 2: recast, but keep same payment:
29 year, $88,238.96 @4%
New monthly payment is 428.82, but prepay $48.60 / month for total payment of $477.42
Total interest paid = $49,103.65, that's 3 cents (rounding error) from what you would have paid had you not recast
Because of the extra payments each month, the loan will be paid off 60 months early, just like before.

As you can see, if you recast and pay the same amount, you end up at exactly the same spot as if you didn't recast in the first place.

And now you can see why banks don't mind you recasting. If you go with the "free cash flow" option and reduce you monthly payment, the bank makes out on interest. So, not only do they get (a lot) more interest from you if you recast, they charge you for the privilege.

I'm sure you will tell me that your strategy of recasting multiple times somehow invalidates this scenario. it does not. All you have to do is repeat the above example for each recast in succession. Regardless of the amount of times you recast, the interest rate (and how it is calculated) stays the same. So, as long as you pay (or pre-pay) the same amount each month, the loan will end at the exact same time and you will have paid the exact same amount of interest. In this case, the free cash flow you unlock goes immediately to the mortgage. In no way does it allow you to contribute more to your mortgage than you did before.

If, on the other hand, you exercise the ability to pay less per month, you will pay more, not less, interest than you otherwise would have done had you not recast. That's the cost of cash-flow insurance.

JGoneRiding
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Re: Huge mortgage mistake

Post by JGoneRiding » Fri Aug 10, 2018 9:19 am

daheld wrote:
Thu Aug 09, 2018 8:36 am
I'm not intimately familiar with every step of the process, but I thought when your remaining balance hits 78% of the original they are required to remove PMI? If you have a ton of cash sitting around, just make a lump sum payment against principal and PMI should be gone. There's probably a formal request you have to do, but I don't think it's a big deal.

Historically, 4.5% is not a terrible rate. If you can pay it off early, just do it. Eliminate PMI with a lump sum, then pay ahead monthly.
If you are goingto do this (and I think it's a good idea) get it in writing first that theu will remove pmi with a 15% equity payment and at the same time ask for a reacast. So that your required payment drops. Then pay as much or little extra as you feel like

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sunny_socal
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Re: Huge mortgage mistake

Post by sunny_socal » Fri Aug 10, 2018 9:36 am

No mistake at all IMO, your PMI is not very large. I just did a 80-10-10 mortgage to avoid PMI but OTOH I'm still paying a little 'extra' for that 2nd mortgage to make the 1st 'seem' like 80% LTV. Is that interest payment going down the drain? Perhaps, but I didn't have to put down as much.

Refi later if this bothers you. However interest rates are likely to trend UP since the economy is strong so it's likely not going to be quite as easy as we're used to.

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UpsetRaptor
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Re: Huge mortgage mistake

Post by UpsetRaptor » Fri Aug 10, 2018 9:48 am

Just pay extra principal in the short term until you get to the 20%, and request the PMI to go away. Beyond that, I'd sit on the 4.5% as opposed to doing a refi. Historically that's not a bad rate, and they're going up. You'd probably just be paying to Refi when rates are higher.

sergio
Posts: 148
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Re: Huge mortgage mistake

Post by sergio » Fri Aug 10, 2018 10:20 am

Thanks everyone. Seems like the best plan of action after thinking about it and reading all the replies is to simply pay extra until the PMI drops. I'll probably do this over a 2-3 year period. Then I'll rethink things again - either refinance, keep paying the extra towards the mortgage, or put the money towards another use depending on where interest rates are, my situation at that time etc.

My gross income is $120k, I max out the 401k, HSA, Roth and spousal IRA as well (wife doesn't work yet). Place we bought was around $230k, monthly payment (PITI+HOA+utilities) is about $1700/month, with about $310 of that going towards the principal. :annoyed

If I could back and do it all over, in a perfect world, I would've done 10% down ($30/month PMI) w/a 15 year mortgage, but oh well.

Dottie57
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Re: Huge mortgage mistake

Post by Dottie57 » Fri Aug 10, 2018 10:29 am

sergio wrote:
Fri Aug 10, 2018 10:20 am
Thanks everyone. Seems like the best plan of action after thinking about it and reading all the replies is to simply pay extra until the PMI drops. I'll probably do this over a 2-3 year period. Then I'll rethink things again - either refinance, keep paying the extra towards the mortgage, or put the money towards another use depending on where interest rates are, my situation at that time etc.

My gross income is $120k, I max out the 401k, HSA, Roth and spousal IRA as well (wife doesn't work yet). Place we bought was around $230k, monthly payment (PITI+HOA+utilities) is about $1700/month, with about $310 of that going towards the principal. :annoyed

If I could back and do it all over, in a perfect world, I would've done 10% down ($30/month PMI) w/a 15 year mortgage, but oh well.
The 30 year option is a safe option. Do not feel bad about it. Lose your job andout work - easier to pay the mortgage.

RL1013
Posts: 43
Joined: Wed Mar 21, 2018 10:56 pm

Re: Huge mortgage mistake

Post by RL1013 » Fri Aug 10, 2018 10:47 am

ryman554 wrote:
Fri Aug 10, 2018 9:13 am
RL1013 wrote:
Thu Aug 09, 2018 9:36 pm
Didn't have to pay anything for recast. I am aware that the terms will change. Primary objective is to increase cash flow.
Then recasting provides some benefit. Notice that there are usually nominal $x00 fees (mine is $250) to recast, so the choice to do so is really driven by a perceived need to unlock "free cash flow" after a substantial pre-payment. I suggest one only use it when faced with a pending large emergency. Putting all of your emergency fund (for example) into home equity is a bad idea.
But if you repeat the recast strategy until payoff, you will definitely pay the loan faster. If you compare with direct additional payment without recasting, you are correct in stating that you will save a small amount in interest.
This statement is patently incorrect, and you misread my statement. Nowhere did I say you save any interest when you recast. In fact, I said you save absolutely zero interest (and do not accelerate your payoff in any way) when you do so, as long as you pay the same amount every month. Lets do the calculation, shall we?

Scenario:
30 year, 100k loan, 4% interest rate, pre-pay 10k at the one year mark.
Monthly payment = 477.42
Total interest paid over the life of the loan (no pre-payment): $ 71,867.97

At one year (after pre-payment!)
Loan balance after 12 payments = 98,238.91 , so 88,238.91 including extra 10k.
Total interest paid = 3,967.95 at the 12 month mark.
Because of the prepayment, you will payoff the loan 60 months early.
Total interest paid over the life of the loan (with pre-payment): $ 53,071.57 , Total interest saved: $ 18,796.40
You still have to pay $49103.62 in interest in the next 24 years.

Option 1: recast and reduce mortgage payment:
New loan term:
29 year, $88,238.96 @4%. Note, this extends the loan back to the original 30 year timeline.
New monthly payment is 428.82 ($48.60 / month less!)
Total interest paid = $60,988.73 -- wait, that's $11885.11 more interest than I would have paid had I not recasted? Why? Because my payment per month is less, so there is more principal left each month to accrue interest. Let's pay the original mortgage payment

Option 2: recast, but keep same payment:
29 year, $88,238.96 @4%
New monthly payment is 428.82, but prepay $48.60 / month for total payment of $477.42
Total interest paid = $49,103.65, that's 3 cents (rounding error) from what you would have paid had you not recast
Because of the extra payments each month, the loan will be paid off 60 months early, just like before.

As you can see, if you recast and pay the same amount, you end up at exactly the same spot as if you didn't recast in the first place.

And now you can see why banks don't mind you recasting. If you go with the "free cash flow" option and reduce you monthly payment, the bank makes out on interest. So, not only do they get (a lot) more interest from you if you recast, they charge you for the privilege.

I'm sure you will tell me that your strategy of recasting multiple times somehow invalidates this scenario. it does not. All you have to do is repeat the above example for each recast in succession. Regardless of the amount of times you recast, the interest rate (and how it is calculated) stays the same. So, as long as you pay (or pre-pay) the same amount each month, the loan will end at the exact same time and you will have paid the exact same amount of interest. In this case, the free cash flow you unlock goes immediately to the mortgage. In no way does it allow you to contribute more to your mortgage than you did before.

If, on the other hand, you exercise the ability to pay less per month, you will pay more, not less, interest than you otherwise would have done had you not recast. That's the cost of cash-flow insurance.
If we repeat the strategy, there comes a point in time where the total principe remaining is less than the recast amount. Instead of doing the final recast, i would payoff the loan when that scenario comes. In the end I will definitely reduce the term of loan and save on interest. As I stated early, i am aware that there will be minimal difference in interest when compared to regular extra payment.
If you do the calc as above with 1000 per month additional vs 12000 per year recast, the loan would payoff around the same time with 1 or 2 month difference and an additional approx 1600 in additional interest. For me the additional flexibility of how to use the extra cash flow give me more options. I can either put it back as additional mortgage payment or use it for more urgent things or play waiting game on some of the investments where there is a high entry investment and allocate it there if the returns are high. For larger loans, i can bring the payments down to a level where it makes sense to rent out the house in a rent appreciating neighbourhood (if it is not your primary res). As I said this works perfectly for my overall strategy, might not work in your case.
My bank allows recast only if I do an additional pay of 20k.

clutchied
Posts: 564
Joined: Mon Jan 05, 2015 12:11 pm

Re: Huge mortgage mistake

Post by clutchied » Fri Aug 10, 2018 2:42 pm

sergio wrote:
Wed Aug 08, 2018 10:35 pm
I closed on a townhouse 2 months ago. We bought a place pretty much on the absolute low end of our price range. Super happy with the place.

I'm going to spare the details of the flawed thought process I used, but I ended in taking a 30 year mortgage at 4.5% with $60/month PMI (0.35 points). I took the 30 year to be safe and only put down 5% to keep a huge emergency fund.

Now that the stress of Buying a first home has passed, I am kicking myself. Even under the current terms I can probably pay this off in 10 years, maybe less. I am clueless how I can proceed (refinance?) to get a lower rate and get rid of the PMI.

I don't qualify for the mortgage interest deduction, which makes this even worse , so I really want to get this paid off asap with as little interest as possible. I was way too conservative as the whole experience stressed me out more than I thought.
$60? Ignore it...

ryman554
Posts: 1094
Joined: Sun Jan 12, 2014 9:44 pm

Re: Huge mortgage mistake

Post by ryman554 » Fri Aug 10, 2018 3:05 pm

RL1013 wrote:
Fri Aug 10, 2018 10:47 am
If we repeat the strategy, there comes a point in time where the total principe remaining is less than the recast amount. Instead of doing the final recast, i would payoff the loan when that scenario comes. In the end I will definitely reduce the term of loan and save on interest. As I stated early, i am aware that there will be minimal difference in interest when compared to regular extra payment.
Let's be absolutely crystal clear. There is *no* difference in interest payments pre-paying and pre-paying and recasting as long as you put the same amount of money into the mortgage at the same time.

I have no idea what the "final recast amount" is, but let's wait.
If you do the calc as above with 1000 per month additional vs 12000 per year recast, the loan would payoff around the same time with 1 or 2 month difference and an additional approx 1600 in additional interest.
If you are saying that you pre-pay 1000 a month for one year vs pre-pay 12000 once at the end of the year, of course the monthly payment plan works out better because you are putting money in earlier on average. But this is absolutely independent of whether or not you recast. Can we agree on this?
For me the additional flexibility of how to use the extra cash flow give me more options. I can either put it back as additional mortgage payment or use it for more urgent things or play waiting game on some of the investments where there is a high entry investment and allocate it there if the returns are high. For larger loans, i can bring the payments down to a level where it makes sense to rent out the house in a rent appreciating neighbourhood (if it is not your primary res). As I said this works perfectly for my overall strategy, might not work in your case.
My bank allows recast only if I do an additional pay of 20k.
What extra cash flow are you talking about here? You get an interest benefit by paying down your mortgage more quickly. If you recast, and choose to pay the mortgage more slowly than you did before (that would be Option #1 in my previous post), you end up paying *more* interest than you would have had you chosen not to recast. And this is not a small amount of interest. You are still paying less than if you didn't pre-pay in the first place, but if you're saying your strategy is paying less interest overall because you are recasting, you are being misleading. You are paying less interest overall because you are pre-paying your mortgage, but more than you could have done because you are lowering your monthly payment.

Fact 1: you are really paying less interest overall because you throw more money at your mortgae than the amoritization table requires.
Fact 2: the amount of interest benefit is independent of if you recast, it depends only on the amount paid monthly (+ extras)
Fact 3: one can recast after paying a certain amount extra, but at the expense of additional interest unless you keep the monthly payment the same as before the recast.

Your strategy as I see it is to prepay your mortgage and use recasting to reduce your monthly payments and extend the loan by diverting some of money targeted at the mortgage to other purposes.

Prepaying the mortgage is the only thing here which pays off your mortgage faster / reduces overall interest paid.
Diverting money / freeing up cash flow does a lot of things which may benefit you, but it causes you to slow down your mortgage payoff. In this sense, the recast does the opposite of what you are suggesting it does.

I honestly am not trying to attack your strategy. If it works for you, great. I want to educate others in how the math works and how the recast actually works. You seem to be conflating pre-payment and recasting, where they are two separate, distinct actions in reality. If you think I am still missing your point, please show me some worked out examples (like I did) that take you down to $0 quicker via your method, because I come to the opposite conclusion.

3funder
Posts: 712
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Re: Huge mortgage mistake

Post by 3funder » Fri Aug 10, 2018 3:06 pm

masha12 wrote:
Wed Aug 08, 2018 10:58 pm
If you refinanced to a 15-year mortgage, what would the rate be? If you put 20% down, how much of an emergency fund would you have left? Could you prepay your mortgage to get rid of PMI?

Even without knowing the answers to these questions, you didn't make a "huge" mistake. I'm not even sure you made a "mistake." In the history of mortgage rates, 4.5% is not ridiculous. And while paying PMI is not the smartest thing in the world, you apparently have enough in savings to avoid paying it. Don't beat yourself up over it.
+1.

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