pmi

[edg126]

When we purchased our house we only put 10% down. Now a year and a half later we only have about 87% equity in it. We are able to get PMI removed in July after 2 years.

Do you think I should treat the PMI as a 'debt' (we owe $24,000 to get to 81% equity, and pay $1200 a year for pmi)

I've been using the dave ramsey baby steps as a guidance, and would be on building up our emergency fund otherwise...

Combined Salary : $141,000
401K : $53,000 (15% + 4.5% company match) my wife has 20,000
ESPP : $7500 (this is earmarked to buy my wife a 'new' used car in June once it gets to about 10K)
Savings (emergency fund): $18,000


Our last debt, the car loan, I was paying 'only' $400 a year in interest at it's beginning value, so compared to that, $1200 is a lot.

[Petunia 100]

I'd look at it as additional interest on part of your mortgage debt. Since it is high interest, paying it down should be a high priority.

[riverwed070707]

I'd look at it as additional interest on part of your mortgage debt. Since it is high interest, paying it down should be a high priority.

Why is it high interest? On average its about a half a percent...

PMI has become such a dirty word. While its ideal not to pay for something you don't have to, .5% of your total mortgage loan is a pretty small fraction. If you have no other debts, its not a bad idea to pay down your mortgage faster but the savings from the lower morgage balance is substantially more beneficial than the actual gettign rid of PMI

[Petunia 100]

Why is it high interest? On average its about a half a percent...

PMI has become such a dirty word. While its ideal not to pay for something you don't have to, .5% of your total mortgage loan is a pretty small fraction. If you have no other debts, its not a bad idea to pay down your mortgage faster but the savings from the lower morgage balance is substantially more beneficial than the actual gettign rid of PMI

It's .5% of your entire balance, but you owe it because you put less than 20% down, making the effective rate much higher.

Suppose you bought a house for 200k, and put down 10% plus closing costs, taking a mortgage for 180k at 4%. Because of that additional 20k of debt, you must pay .5% on 180k, making the effective rate on that additional 20k 4.5% in addition to the mortgage interest rate of 4%, for a total effective rate of 8.5%. I consider a risk free return of 8.5% to be pretty sweet.

[edg126]

My thinking used to be that of riverwed, that .5% isn't that bad when factoring it into the whole cost of the mortgage. playing around with bankrates mortgage amortization calculator it looks like if I keep my current payment method with an extra $64 a month (to round it to an even $2200 a month for mortgage, taxes, insurance,and pmi i get:

extra $64 (currently paying this): reach 20% July 2017
extra $150: December 2016
extra $400: October 2015

So for somewhere between 7K to 10K in extra payments over a year and a half I can save $2400 in PMI, which would align with what petunia was getting at.

I can do $400 without much effort for most months.

[snafu]

If you can direct $ 400. each month directly to principal plus the likelihood of home values increasing should eliminate that extra cost of PMI faster than you anticipate. Since you likely get a tax deduction for interest on your mortgage you might consider adding that figure as an extra payment to principal. Make sure your mortgage holder understand you want the extra amounts paid directly to principal.

[riverwed070707]

It's .5% of your entire balance, but you owe it because you put less than 20% down, making the effective rate much higher.

Suppose you bought a house for 200k, and put down 10% plus closing costs, taking a mortgage for 180k at 4%. Because of that additional 20k of debt, you must pay .5% on 180k, making the effective rate on that additional 20k 4.5% in addition to the mortgage interest rate of 4%, for a total effective rate of 8.5%. I consider a risk free return of 8.5% to be pretty sweet.

I'm not following... how do you get an 8.5% return? You aren't paying off the full balance of the mortgage. Further, if you're going to be that technical about it, you'd also have to factor in the return you would be getting on the additional payment if you invested it instead or the tax savings if you contributed it to retirement. Lots of variables and you've far oversimplified it by saying avoiding PMI=8.5% return. Its great to pay it off and have equity in your home that can withstand large market dips but lets not glorify the financials.

[MonkeyMama]

I agree with petunia. Technically the PMI is only on a very small portion of your loan, making an effectively large interest rate.

Other points:

Having less than 20% equity home is risky. I'd consider it a priority to get that paid down.

Your equity is a moving target. You may or may not be able to reach your goal in July 2014. What if the value of your home drops?? For this reason, I'd consider it somewhat of an "emergency", just like DR would, and try to get the PMI dropped. It could be moot as value can shoot up and maybe you can drop PMI anyway. But, I'd want to hedge my bets, because you never know.

[riverwed070707]

I agree with petunia. Technically the PMI is only on a very small portion of your loan, making an effectively large interest rate.

Other points:

Having less than 20% equity home is risky. I'd consider it a priority to get that paid down.

Your equity is a moving target. You may or may not be able to reach your goal in July 2014. What if the value of your home drops?? For this reason, I'd consider it somewhat of an "emergency", just like DR would, and try to get the PMI dropped. It could be moot as value can shoot up and maybe you can drop PMI anyway. But, I'd want to hedge my bets, because you never know.

Thats not true. A mortgage contract will state it is dropped when you reach 78% equity based on the purchase price of the home and generally lists the dollar amount. While you can drop it sooner when you reach 80%, equity may be a moving target but the point where PMI discontinues is not.

Again, I'm all for paying down the house early, having a safe amount of equity and I don't dispute that it may be risky to have too little equity, but lets present accurate facts here people.

[Petunia 100]

I'm not following... how do you get an 8.5% return? You aren't paying off the full balance of the mortgage. Further, if you're going to be that technical about it, you'd also have to factor in the return you would be getting on the additional payment if you invested it instead or the tax savings if you contributed it to retirement. Lots of variables and you've far oversimplified it by saying avoiding PMI=8.5% return. Its great to pay it off and have equity in your home that can withstand large market dips but lets not glorify the financials.

If you're not following, try looking at it this way: how much PMI will you pay if you put down an additional 20k? None. How much do you pay if you don't put that 20k down? $900 (annualized). How much is that 20k costing you? $900 - $0 = $900. What is the cost expressed as a percent? $900/$20,000 = 4.5%.

It is interesting that the effective rate rises as you pay down that 20k. When the mortgage is paid down to 170k, the PMI would amount to $850 per year. But now, the amount causing the PMI to be assessed in the first place is only 10k! $850/$10,000 = 8.5%. Even more of a reason to pay it down as quickly as possible.

Yes, of course there are many other ways you could choose to use that 20k. Some may indeed work out better in the long run. But applying it here saves PMI and mortgage interest, guaranteed. The only guaranteed places to do better I can think of are paying down even higher rate debt, and contributing to an employer plan enough to get the match.

[Petunia 100]

Thats not true. A mortgage contract will state it is dropped when you reach 78% equity based on the purchase price of the home and generally lists the dollar amount. While you can drop it sooner when you reach 80%, equity may be a moving target but the point where PMI discontinues is not.

Again, I'm all for paying down the house early, having a safe amount of equity and I don't dispute that it may be risky to have too little equity, but lets present accurate facts here people.

Obviously she is talking about paying it down faster than scheduled, not waiting to hit 78% of the purchse price. As you correctly point out, that particular point in time is fixed.

[MonkeyMama]

Thats not true. A mortgage contract will state it is dropped when you reach 78% equity based on the purchase price of the home and generally lists the dollar amount. While you can drop it sooner when you reach 80%, equity may be a moving target but the point where PMI discontinues is not.

Again, I'm all for paying down the house early, having a safe amount of equity and I don't dispute that it may be risky to have too little equity, but lets present accurate facts here people.

Thanks for the clarification riverwed.

I am sorry - pmi is something I know *knothing* about, logistically. Except from what I have learned on this forum, I suppose. I know what it is, and I know enough that I Stongly advise against it, but have never dealt with the details. I find it interesting that it has nothing to do with actual value of home. But this is why I am here - always learning something new.

[riverwed070707]

Obviously she is talking about paying it down faster than scheduled, not waiting to hit 78% of the purchse price. As you correctly point out, that particular point in time is fixed.

You don't have the house reassessed when you request PMI to be dropped unless you think the value has inflated significantly and you have reached 20% before you paid down to the original 78% LTV; therefore, it doesn't matter if it takes you 2 years or to to reach that number or 10 its a fixed target.

[MonkeyMama]

edg126 - are you sure you can remove pmi on your loan? When you get to 81% loan to value ratio, of original purchase price?

Apparently it depends on the loan. A loss of home value can impact your ability to drop PMI. (I looked it up because I was sure I had heard otherwise).

So, yeah, I stand by my original comments.

[ua_guy]

If it's an FHA loan, the rules can be different. For example, loans issued after June-ish of 2013 require PMI to be carried for 5 full years, regardless if the LTV, which where value = purchase price, has already reached the 78% threshold.