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I recently wrote up an analysis on the PMI insurance my wife is paying on her mortgage. I calculated we would get an initial after-tax 6.77% rate of return by paying down her mortgage $19k; just enough to cancel the PMI insurance.
Well this plan has not panned out very well -- after reading the fine print, I realized that while the PMI can be cancelled for free when the mortgage balance falls to 78% of the property value at time of purchase, the FHA mortgage requires PMI to be in place for at least 5 years after the closing.
Since my wife has only had the mortgage since October, 2004, we still have 2 years to go before we could execute this plan. Since we are saving for a new home, I am hopeful we will have moved out and sold the townhome long before then.
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Comments (6)
what i would recommend is to refinance the loan through a different broker (especially since the rates should be coming down in a bit) and make sure there is no clause on the PMI... then go ahead with plan... also factor in that PMI is tax deductible this year, and may be deductible next year...
Posted by Anonymous | December 12, 2007 9:44 AM
The fine print in my mortgage docs said PMI could be canceled after a minimum of 3 years from close. But in speaking with the bank and finding out their stance, I was able to cancel PMI 2 years after close. If you work with them, you might be able to get a break.
P.S. I look forward to reading your blog every weekend...great job!
Posted by Mike B | December 12, 2007 6:32 PM
That's one of the tips that constantly surprises people: You only need PMI insurance for a little while, then you can cancel it!
I use to work for an insurance company and that's where they made most of their money - from people who didn't need to be paying PMI. It's a ridiculous industry, but I'm glad you canceled it. And I'd definitely give the refi a try (as recommended above).
Justin
http://www.themortgagepot.com
Posted by Justin | December 12, 2007 9:20 PM
Take a look at the 1998 Homeowners Protection Act. I can email a summary sheet that my mortgage broker gave me when I closed.
My mortgage broker sold the mortgage right away on a "flip" house that I bought to live in. It was in bad shape, but the guy gave me a great deal. I updated it and about 3 months later got another appraisal which put me well over 22% equity.
My new mortgage company tried to pull that 5 year crap, but this document was all I needed to get them to back off.
Nowhere in my documents did it say 5 years.
The document states that PMI must be automatically terminated if "all payments are current."
I sent it in and kept pressing the argument - Andy Dufrane style. They finally gave in and acknowledged that they weren't following the requirements perfectly.
Posted by Wes | December 22, 2007 8:36 PM
Wes -- thanks for the tip. Im am going to look into this. If you don't mind me asking, what company were you dealing with?
Posted by 2million | December 22, 2007 10:51 PM
Unless you pay for the house in cash, it seems like the banks are always going to win. I do the math in my head and if you have a 20% down payment you aren't required to have PMI. However, once you are in a loan, you have to wait until the 78% mark (22% equity) before you cancel the PMI.
Then, like you found out there are minimum time limits that you must have the PMI. If you find different banks that have better benefits, then their interest rates are a tenth of a percentage point difference so you pay the difference anyways.
Posted by Brandon J | December 27, 2007 5:14 PM