The PMI Conundrum: What Would You Do?

Remember how I said that removing the PMI from our mortgage payment was one of our 2017 goals? Twice?

To be perfectly honest, I hadn’t actually run the numbers yet. And, to continue in perfect honesty, I still haven’t really run the numbers. Instead, I talked someone on the Rockstar Finance forums into doing the math for me, because I’m lazy bum. Specifically, the lovely folks from Debt Ascent applied their mathematical prowess to my conundrum, for which I am exceedingly grateful.

If you don’t want to click the link above, the math goes like this: if I invest the amount that I would otherwise put into paying down the house to get the PMI off this year and continue investing that amount indefinitely, I could conceivably have $34,000 more at the end of my loan period. Behold, the power of compound interest.

That number is not totally accurate. I would be able to pay off the PMI a little sooner than the assumptions made in the calculation, both because I can make payments of slightly more than $1,000 for the next year, and because I confirmed that the PMI comes off at 80% of the home’s value, not 78%. Still, the difference is large enough that, from a pure math perspective, it makes more sense to not pay off the PMI.

I have additional reasons I want the PMI gone, however. It’s frustrating to know that we’re paying $600 a year for the “privilege” of borrowing money. As a principle, I oppose PMI. It’s also nice to think that if we needed to move rapidly, we would have at least enough equity in our house to get us into another.

Having the extra $50 of flexibility n our budget each month would also be nice. We will likely not have an “extra” $1000 each month for the next couple of years, for mysterious undisclosed reasons. This is going to be somewhat of a windfall year, and then the budget will be tighter for a few years afterward, unless we receive substantial raises. Extra wiggle room is always helpful.

On the other hand, the fact that we won’t be able to continue investing at a super high rate for the next few years is an argument for exactly why it may be smarter to invest now. That gets the ball rolling on our compound interest sooner rather than later. But the stock market is really high and may be headed for a correction… but maybe not?

Ultimately, I’m all for keeping the “personal” in “personal finance,” but I also know that the way to win with money is to make decisions based on numbers, not the heart.

So tell me, dear readers, what would you do in our case?

12 Replies to “The PMI Conundrum: What Would You Do?”

  1. Daniel Palmer

    The age old dilemma! I lean toward eliminating the PMI precisely for the cash flow reasons you mentioned. Maxing your net worth is fine and dandy, but is pointless if you have cash flow issues.

    • Ms. Steward

      Realistically, we have a large enough emergency fund and enough that’s cut-able in our budget that we shouldn’t run into any long-term cash flow issues… but most people think that before they have them. 😉 Thanks for the vote (especially since it matches what I wanna do anyway-ha!)

  2. Emily

    Eliminating PMI=eliminating on more “thing” and variable. I think it’s good to get it over and done with, even just from an emotional side (my default setting – not logical)

    • Ms. Steward

      It’s not really a variable–they can’t raise it on me. It’s only a “thing” inasmuch as there is a question about it.

      That is the basis of the post basically–do the emotional thing or not? We probably will in this case, but doing that all the time with a finances would bring us to ruin, since our margin is so small.

  3. Kyle

    You’re against PMI? Get rid of it! I’m not convinced that winning with money is a numbers game. If you’re using your money to work toward the goals you want to achieve, that sounds like a win in my book. At the end of the day, if you’ve got the three-car garage and the heated swimming pool in your basement but you were uncomfortable the entire time it took to get there, that’s a wasted day.

    • Ms. Steward

      I think winning is a mixture of a numbers and emotional game. Having all the money in ways you don’t believe in or you can’t enjoy it pointless–but so is not having any money. 😉

      In this case, we’re probably just going to go ahead and knock out the PMI. If it were going to take us longer than a year, that would be one thing, but since we can do it relatively quickly and have it done, the flexibility will be nice.

  4. Kimberly @ 80/20 Your Finances

    I’ll vote for getting rid of the PMI. I think that the stock market is in for a correction soon, so that’s a risk if you went the investment route. Paying off the PMI and reducing your budget is a sure thing. And if the housing market takes a dive (even if just in your area), you’ll end up waiting until 78% to get rid of PMI.

    A lot of personal finances is a mind game. And piece of mind is worth a lot. Take the stress off.

    • Ms. Steward

      I agree on the correction–I talk a big game about not timing the market, but it’s hard to want to put a huge amount in right now when I know there are other goals I want to accomplish first.

      I’m not sure what you mean on the waiting on the 78% part. If housing took a dive, it doesn’t really make an impact on PMI either way, since we need to hit that 78% regardless. Can you clarify?

      Thanks for swinging by!

      • Kimberly @ 80/20 Your Finances

        So at 80% you are asking them to cancel it but it is not mandatory. The mortgage company has a few things that they can do to deny it, one being if they feel that the house has decreased in value since you purchased it. At 78% or the mid-point of the loan they have to do it. But for many people, it can take a long time to get that extra 2%.

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