I recently received an email from a reader, LC, who wants to lower her housing costs 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 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.
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.
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?
Other Topics in the Help a Reader Series
The math is tricky, esp because:
– paying interest to family members will require them to report it as income on their tax return
– PMI is deductible on your tax return, so eliminating it has the benefit of paying less but also may add a bit to your tax bill.
I looked into this once, and it worked out that it worked out to be much easier to accelerate my payments, rather than to involve the family. The extra book keeping for a family loan with interesting, plus the potential for a strained relationship was not worth it.
The main reason I came to this conclusion:
– in this economy, ~30k isn’t a trivial amt of money, especially with people losing their jobs and a storm is still coming..
– either way, I’d essentially be taking on a new loan, in addition to my current mortgage.
To simplify things, keeping the deadlines the same (ending of PMI & paying back the family in fully). Either way I’d be paying an extra $300/month that I wasn’t currently doing. However, keeping the loan to my self, half of that would be deductible on my taxes, since PMI is deductible (atleast for my income level). I factored this into my accelerated payments (used TurboTax to ballpark numbers), so any tax savings would be rolled towards the principal.
Hope that helps, as another way of looking at things. It’s almost impossible to figure out the true savings for you & the family because you’d have to know their income/tax deductions etc, to know the direct impact.
Especially, if borrowing from older family members, their income tax situation might be vastly different from yours, esp depending on investments & required retirement account distributions etc.
You are missing one bit piece of information, the original term of the loan. Is this a 30 year loan as looking at the amortization tables, they don’t match up. If this is a 30 year loan – then we need to know the payments along the way (the extra paid) so that we can get the proper numbers to make this a valid assumption. If this were a 30 year loan, and 2% interest as stated, then the current value of the loan should be 460172.06 and they would hit the PMI removal mark early in 2016.
All of this is simple calculations and I have the tables to do this, but I don’t want to be liable for wrong info as it does not match up with what is being displayed. This is obviously an ARM, and was there a separate interest rate (like zero) for the first few years? Was this refinanced?
What you do is pretty simple, make two separate Sheets in excel. On both sheets, you have the following columns “month”, “Principal of Mortgage”, “Interest of Mortgage”, “PMI”, “Cost for additional HE Loan”, “Tax benefit”, “Total Cost”. You have this for each scenario you play (one is paying PMI until you hit 20% equity in your home), the other is taking out a HE line to pay off the equity until the magic date you have listed.
Sum it all up (minus tax benefits) and you have the net costs for each method. Which ever one costs less is your best bet. If you want to get really technical you should put in the Time Value of Money with something like 2.1% for inflation. However this would give you rough numbers for each item to see if it works with the TVM addition giving you the true costs.
I know I rambled, but I need more info before I can give true advice as the numbers that have been provided are not adding up, and the term of the loan is key to determining the amoritzation table, which has a huge difference in the loan. The payments also have a huge difference as well (as if I understand it, with an ARM, your payments go up when your interest goes up). I figure you should have a 1940.5 mortgage with a 30 year ARM at 2%, which is why I cannot proceed with giving advice.