Should I Refinance My Mortgage To Get Rid of PMI?
Life brings a lot of great opportunities, is refinancing my mortgage now one of them.
I realized that the home values in my area have risen a tremendous amount. So, the idea I had was to call up my lender, have an appraisal done for a couple hundred dollars, and knock it out. Soon, I discovered that I could refinance too. After running a couple of calculators, I also realized I could save some money on interest in the long run and reduce my monthly mortgage.
So, on with the research?
Should I Refinance to Get Rid of PMI?
At the current time, I believe refinancing would be a long term loss. See below for all of the research and thoughts.
When do I plan on selling? And some other initial questions…
- Do I really plan on keeping this property for 30 years? Initial thought is that I will not stay in the home for 30 years, so the costs to refinance for about $100 less a month is not worth it as I will not recapture the losses incurred by the refinance.
- If I don’t, am I looking to maximize short term gains when running the calculation?
- Do the extra costs per month, based on the existing loan, total more than I would pay in extra interest paid on the refinance loan?
Will I really save on interest with a refinance?
I’m assuming no. I bet all of these calculators are running a comparison against my existing loan to show savings. They probably aren’t taking inot consideration how much interest I’ve already paid.
All of the calculators are stating I will. I need to find out actually how much I will save on interest. After all, the amount of money I’ve already paid to interest is a lot. So, I’ll put together a chart at some point:
Current Numbers assuming applying right after 2 years
- Original Loan Amount: 175,000
- APR: 3%
- Principle Paid: 5208.61
- Interest Paid: 7334.10
- Total Interest for life of loan: 90610.54
- Total PMI Paid: 3605.04 (Assuming 150.21/month)
- Monthly Payment: 1121.35 (includes PMI)
- Monthly Payment without PMI: 1121.35 -150.21 = 971.14
If refinance now with no PMI
- Original Loan Amount: 169,791
- APR: 3%
- Principle Paid: 0
- Interest Paid: 0
- Total PMI Paid: 0 – Assuming I can refinance without PMI
- Total Interest for Life of Loan: 87913.45
- Monthly Payment: 942,23
Total Cost if I refinance with no PMI
- Original Loan Amount: 175,000
- APR: 3% (on both)
- Principle Paid: 175,000 (principle doesn’t change)
- Interest Paid: 7334.10 + 0 = 7334.10
- Total Interest for Life of the Loan: 7334.10 + 87913.45 = 95,247.55
- DIFFERENCE IN INTEREST: 90610.54 – 95,247.55 = -$4,637.01
- Monthly Payment Difference: 942.23 – 971.14 = 28.91 (I will have to pay an extra 28.91 for refinancing without PMI versus not refinancing and eliminating PMI.
- Result: If I keep the loan until term, I will pay an extra $4,637.01
- Decision: I will just get an appraisal at the new amount. This will cost me $500. But, in the long run, I will save ~4600 plus any extra expenses to refinance. Plus, I will pay off interest sooner.
Theory: This chart will reveal I will pay off the mortgage earlier with the existing loan. I will end up paying a LOT more in interest. I will save maybe $100 a month extended out over time, but will pay thousands more in interest over time.
What should the Long Term Value (LTV) value of my house be to get rid of PMI?
Ah math class. It’s been a while. I looked online to determine how much my house must cost in order to reach the correct LTV. I couldn’t find anything, so the calculation below should help. If you want to have PMI drop off the loan must be 78% of the LTV. If you are trying to force removal of PMI earlier, it’s 75%, or 80% if you’ve had the loan for over 5 years.
Here’s what the value of my home should be considering the PMI percentage:
Example: I owe $175,000 on a home or property. How much does my house have to appraise to get rid of PMI? I pay $X for PMI each month.
- ([How much you owe on your loan] / [Percent you need (75,78,80 ]) * 100
- 75% LTV Calculation: (175000/75)*100 = 233,333.33
- 78% LTV Calculation: (175000/78)*100 = 224,358.97
- 80% LTV Calculation: (175000/80)*100 = 218,750.00
What are the current interest rates and are they better?
Because this is a second property, the interest rates were a little higher. So, what the banks are showing online may not be what I could get. I would definitely have to get a VAR loan. I could end up getting a new refinance at or about the same interest rate.
Will this help? I would assume not as I would mean I lost all of the previous interest and would start all over again paying more. Because the interest rates will be so close, the difference in savings per month may only be a $100. Definitely not worth getting another loan and throwing away thousands of dollars for a couple hundred a month.
At this point, I think an appraisal would be best in the long run. I’d pay $500 and save a couple hundred in PMI per month and pay more principle each month. I will still run the numbers to see.
I would also think if I’m going to buy another property, this new refinance or loan would affect buying the new property.
What would the new interest rate be?
Based on some initial research, the interest rate will be the same. So, it does not make sense to proceed with a refinance.
Would it affect a new loan for more properties?
It appears as though it could effect other purchases in the near future based on credit score changes. Considering there is a possibility of purchasing other homes in the future, I’m not going to refinance. However, refinancing would lower my monthly expense ratio, which would be good.
I‘m assuming if I wanted to borrow from the existing house to purchase another house I couldn’t. Not sure.
It would be possible to borrow from the house based on the equity. The refinanced amount owed would be more than the final amount owed now on a partially paid down loan.
This article on refinancing my mortgage will be updated periodically based on gaining new knowledge. I’m not an expert but want to make the best logical decisions. I’ll do yearly updates as I figure it out.