I recently received an email from a reader, LC, who wants to lower her housing costs [1] by eliminating their PMI, or private mortgage insurance.
She says: “We have been paying $126.22 per month in PMI and feel like we are throwing the money away.”
Obviously, it’s worth taking some time to figure out how to help LC avoid the additional $1500 annual expense. I also figured this exercise would apply to other readers who also want to eliminate their PMI payment. And for those of you who love to challenge yourself with fun math problems, here is your chance to shine!
Home Details
Home Purchase:: May 2008 for $525,000.
Request to Cancel PMI: Per the lender on the date that the principal balance of the loan reaches a loan-to-value of 80% or less of the property’s original loan value – which is equal to $420,000.
Current Principal Balance: $450,036.03
Planned Date to Reach 80%: November 2016 – which is 46 months away with current amortization schedule.
Loan Details
Monthly Mortgage Insurance Payment: $126.22
Current Interest Rate: 2.000%
Current Principal & Interest Payment: $1,432.42 (The last breakdown was $681.21 to principal, and $751.21 in interest)
Future Interest Rates and Payment:
- Payments beginning 8/1/15: $1,664.14 at 3%
- Payments beginning 8/1/16: $1,908.73 at 4%
- Payments beginning 8/1/17: $1,971.15 at 4.25% for the rest of the loan.
Borrowing the Money
LC said that they have family members who might loan them the money to get the balance low enough to get rid of the PMI. She wants to structure the loan from family to present the full picture including:
1. Amount borrowed
2. Monthly payment amounts
3. Payoff date – they would like to take the same number of months, so, November 2016.
4. Interest they receive over the duration of the loan.
5. Interest rate they receive on their original loan amount.
She adds:
If we borrowed the money from them, we would like to be able to present the items above for 2 scenarios:
- If the benefit was only theirs – meaning, our payment amount remains the same (only the amount will be split between them and the mortgage company) and we continue paying the PMI amount, but it goes to them instead of the bank.
- If we both benefit some.
In addition, they want to make sure for both scenarios that the tax deduction they would no longer receive for mortgage interest and mortgage insurance is factored in. Their federal tax rate is 15% and their state tax rate is 6%.
Help a Reader
LC is stuck and can’t figure out how to do the calculations with so many variables. Can you help her out? How would you structure the loan from family members to account for all the variables? What other advice do you have for LC?