PMI versus Investing: Help me on the math?


#1

I am at a bit of an impasse with my math skills and also wanting to be sure that I take everything into account, so I’d love some insight into seeing what the difference would be between getting the PMI off of our house (currently $50/month) or investing the amount we would have to put into our house instead into the stock market. The figures:

30 yr. fixed rate mortgage, 3.75% interest rate, original sale price 122,500. Financed 116,500. First loan payment was July 2015. Currently sitting at $112, 763 still owed. Not sure if 80% suffices to remove PMI, or if it will be 78%. Let’s assume 7% market return, and that we’ll be making $1,000/month in extra payments.

What I’m trying to gauge is whether we would be better off, money-wise, to go ahead and put in the roughly $14,000 this year to remove the PMI from the house, or whether we’d be better off to invest that cash and keep taking the $600 annual PMI hit until December 2023, when the loan would finally cross the PMI removal threshold. There are several moving parts that have me stumped about how to completely perform the calculation with any accuracy. Anyone have assistance?


#2

Ok, here is how I see it. If, starting in March you apply an extra $1,000 towards principal, you will reach a remaining balance of less than 78% of the original assessed value in May 2018 (15 extra $1,000 payments).

Case 1: Drop PMI
Assuming you pay down loan until May 2018, and you then and there stopped making additional payments and PMI was gone the next month, you’d pay your house off ~September 2039. Assuming you invest the $50 PMI starting June 2018 + your home payment starting August 2039 (assuming it’s $540/mo), I calculate that in July 2045 (the end of your standard mortgage term) you’d have $95k assuming 7% growth on the investments.

Case 2: Invest now
If instead you put the same $1,000 in an investment account each month starting in March 2017 through May 2018 then stopped (at that point what you do with the extra money would be the same in either case 1 or case 2), and also invest the $50 PMI that you no longer pay starting in January 2024 after hitting 22%, I calculate you’ll have $134k using the same investment assumptions at the end of your loan term.

*Note this assumes steady and constant returns, that there’s no cost incurred to remove PMI, and that I didn’t make a mistake in my spreadsheet :slight_smile: .

A few questions to consider:

Is there a refinancing cost in order to remove PMI? If so, that will obviously impact the numbers. If you do need to refinance, can you do it before hitting 78% of the original assessed value to hit 22% equity sooner (assuming value of the home has increased in the last 18 months)?


#3

You, sir or madam, rock!!!

Quick question: Did this account for the fact that we would simultaneously be making the regular mortgage payments AND the extra? My calculations had us reaching the payoff point slightly faster when paying off the PMI.

We don’t have to refinance or get an appraisal to get the PMI off. I called the mortgage people tonight, and we actually don’t even have to hit 78% (which I said to be conservative). We really can do it just by reaching 80% of the original purchase price.

(If we made major improvements we could pay for a re-appraisal, but we don’t intend to make huge ones soon.)


#4

Hi there, in both cases I assumed you made the standard monthly payment each month. In Case 1, I assumed you paid down an extra $1000 each month from March 2017 through May 2018 to drop below 78% and in Case 2 that same amount was instead invested for the same period of time. For your question I assume you mean in your calculation you hit 20% prior to May 2018? If so, my numbers may not be perfect. I used your starting loan balance and rate to estimate your payment and went from there. If you can confirm the payment amount I can run through it again and send you the sheet if you’d like?


#5

I would get rid of the PMI on principle, even if the numbers didn’t point in that direction. I just HATE the concept of PMI, it is truly wasted money.


#7

Argh. This seems sooo counter-intuitive. I wanted so badly to say no, get rid of PMI. You’ll pay ~$58k less over the life of the loan. BUT, darn it, in this case spending more saves you more. (or, front-loading your investments pays off)


#8

I think it’s close enough to tell me what I needed to know. :slight_smile: Thanks so much for your help! I think the math will work a little closer on the pro PMI payoff side, just because I think we can do slightly more than 1k per month. The numbers are wide enough though to make it clear that investing is obviously the better pure numbers choice, though.


#9

Oh, certainly. I’m not saying we won’t do it anyway. In fact, we had pretty much decided to do so, partly on principle, but partly because simply having the flexibility is nice. That’s $50 a month that we don’t have to worry about coming up with (not that we’re strapped, but we hope to have two kids–meaning two in daycare–soon).

That said, the numbers may change things. We’ll have to talk it over!


#10

I know. I think it’s just because our PMI is so low. It’s annoying to think of it as $600/year, but realistically $50/month is really low in the world of PMI.


#11

Regardless of which route you choose, before adding extra money to your existing mortgage with the express intent of ridding yourself of PMI, you should contact the lender. In many mortgages, PMI does not automatically go away by hitting a specific amount of equity. Often, you must also have had the loan for a specific amount of time, typically 5 years. This may not be the case with your loan, but it is worth checking with a quick phone call. The last thing you want is to have the worst of both worlds where you put $14k in and still get the pleasure of paying PMI for another few years - so no investing and still PMI.

You may end up needing to refinance to completely get rid of PMI, in which case, you’ll also need to consider the added closing costs in your calculations.

Another consideration - where is the $14k coming from? In other words, are you about to drop any possible safety net into paying down the mortgage (or investing)? I ask because you only financed the house a couple of years ago. I assume if you had the money at the time, you would have put 20% down and never had PMI to begin with. If this is the case, I recommend caution putting the larges amounts of your savings into either PMI or an investment; set at least a little aside just in case.

On whether to invest or not, I think this is fairly straightforward. How much is PMI/yr + loan interest/yr - tax implications vs. reasonable returns - taxes on any investment (to my knowledge, there is no tax implication of PMI). $50/mo, or $600/yr is 4.285% of 14,000. You presumably save 3.75% on the $14,000, as well, though due to the mortgage interest deduction, the value of which depends on your marginal tax rate, the two combined could be anywhere from around 7% - 8%.

Can you do better than that investing when tax adjusted? I believe that it is possible, though the PMI + overall reduced interest is a sure thing.


#12

We have 15k sitting in an emergency fund, which is about 5 months of expenses. The reason we did not put more down then was because our incomes/savings weren’t as high; buying a house corresponded with our years of making more, particularly my husband getting several very large raises.

I did contact the lender, and they said my options were to either get an appraisal and show that the value had increased 20% (not a possibility), or pay down to 80%, at which point it would come off without refinancing. They are already mailing me, in writing, the terms of my loan and PMI removal.

PMI actually can be deducted from one’s taxes if it’s on a primary residence.

Actually, 7% is pretty much exactly what I scope our investments to operate at. Could they go higher? Sure. But I don’t count on it. Thanks for laying it all out–I’ll make my own spreadsheet when I get home!