Should I make prepayments to eliminate ROI?

Question

Hello,

I just bought a house w/ a mortgage of 30 yrs. + 4.5% interest rate, 3% down. The loan amount was for 235k.

My P&I = 1,194 / mo

PMI = 86 / mo

If I don't make prepayments, then I can get rid of PMI in 10 years..

How do I calculate whether or not I should make prepayments to get rid of PMI? IRR? I want to compare it to other ways I can invest that money if I didn't put it down on principle. Thanks!

Eric Soloway · Answer

thanks @Kelvin He

It is going to depend on your goals. If you want to grow your portfolio, i’m With @Cody L. and PMI is just an expense, keep up and send the letter as the house appreciates which could be a few years to ask for an appraisal to remove the PMI. if this is your only investment, then you can pay it down (you’ll get the money back when you sell)

PMI is less than 1% of the loan balance so you’ll need to put another $44,650 down at this point to save $86 a month. Doesn’t make sense.

Cody L. · Answer

Easy. Don't.  Use your excess funds to buy more property.  When trying to grow, cash flow isn't your concern.  Having enough to put down to buy more is.

Kelvin He · Answer

Hi, thanks for replying - it’s a 3% down conventional loan

Eric Soloway · Answer

Kelvin, I've been in banking (but not directly mortgage) for 10 years so I know enough about this to be dangerous.  First question to you is, 3% down is this a FHA loan?  I'm not sure that a conventional loan can be below 5% and if it's an FHA loan, you're required to keep PMI forever or refinance to a conventional loan in order to have it removed.

That said if the loan is conventional, you have a few options.  PMI can be removed by writing a letter when the LTV drops below 78%.  Most companies will charge you for an appraisal when you make the request and then remove the PMI if you make it.  To get to this level, you could either pay down the loan through payments or make some improvements to the property that raise the value or wait for the market to appreciate on it's own.

In the future, you might want to look for a deal that is below market price so when you buy the property you just have to wait for the loan to season (1 year) and you can ask for the PMI to be removed or popular on Bigger Podcasts is BRRRR where you'd fix up the house, rent it out and then refinance so you can move to the next property.

Hope that helps and isn't too confusing.