We have decided to refinance our mortgage to a 5.875% 30 year fixed. We currently have 80/20 mortgages, which probably wasn’t the wisest choice in retrospec. C’est la vie. Our 80 mortgage is 30 year fixed at 6.375%; however, our 20 mortgage is 15 year balloon amortized over 30 years at 10.25% because we wanted a fixed rate. We have been in our house for 2.5 years and live in an area of the country unaffected by the housing bubble property value-wise, so our house has appreciated about 4.5%. Clearly we don’t have a lot of equity in our home, so we are required to have PMI.
For those that don’t know what PMI is Private Mortgage Insurance. It’s required for those that have less than a 20% down payment to protect the lender against a default. In our case PMI will be approximately $2800. If we were to pay it out of pocket, we would take it from our emergency fund even though this obviously isn’t an emergency. I admit this probably is not a good idea.
I used this fantastic home mortgage template from Vertex42 to look at the interest after 80% LTV, using a 2.5% rate of appreciation, is achieved and the monthly principle and interest payment for each scenario. I am looking at the LTV because you can stop paying PMI once you achieve an 80% LTV.
For paying the PMI out of pocket:
- it would take 8 years to achieve an 80% LTV resulting in $85.7k in interest
- the monthly P&I payment would be $1136
For rolling the PMI into the loan:
- it would take 9 years to achieve an 80% LTV resulting in $95.8k in interest
- the monthly P&I payment would be $1147
Based on this information the P&I monthly payment isn’t worth raiding our eFund. However, after the eFund is fully funded, I think we’ll consider making addition principle payments.