@Tim Boeving I think a basic way to look at it is aggregate cost of debt. What is the rate on your primary home? Do you know what the yield spread is that was used to calculate PMI (we can back into it if you remember your original loan amount and the $90/month figure)? If you add the two together, is that aggregate rate higher than the rate on your investment property?
That is a fairly simple look at it. You also need to ask yourself what the plan is from here. Do you plan to keep the investment long term? Are you trying to acquire more?
@Tim Boeving break it down side by side and do the math. You may also want to check with your CPA. I am not sure you can write off PMI so it may be best to get rid of the PMI insurance since you can write off mortgage interest. I dont know for sure thats why you need to talk with your accountant. They will be able to break it down for you to the penny and you will then be able to make the right financial decision.
Originally posted by @Tim Boeving :
Hello all! I have a rental property that has an ARM and a our current residence that has PMI. Question is do we pay down to get out of PMI or do we pay off the rental? PMI is about $90 and interest on rental is about $130 a month. My obvious thought is to pay off rental but just want to see why you all think and make sure I’m thinking about this right. Any other suggestions are great. TIA!
First, I'd suggest figuring out your PMI rate so you can figure out the effective interest rate. Suppose your PMI is $150/mo and the loan is $300k @ nominally 4%.
$150 * 12 / $300k = 0.6%.
So your actual effective interest rate w/ PMI is 4.6%. And you can drop it to 4% once it's paid down enough.
With this in mind, it should be easiest to see where the highest interest rate is. And one school of thought says pay off highest interest first.
Other school of thought is to pay off lowest balance first, so you can apply the improved cashflow to paying off the 2nd largest balance, and so on.
If both approaches point to the same mortgage, then your choice is done. If they point to different mortgages, then you've got to decide which matches your philosophy best.
What do the numbers look like on the rental? (cash flow, PITI payments)
What are the terms of the ARM?
Have you made any improvements or has the value of your current residence appraised at all? If so, you can save yourself from additional PMI if you get your home re-appraised so you reach 80% LTV.. Also, PMI payments are not tax deductible, unlike the interest payments on your rental property.
I recommend finding a creative way to increase the value of your current residence and shell out the ~500$ for an appraisal in order to get rid of your PMI. In my opinion, PMI is equivalent to throwing money down the drain.
Refinance the ARM to a 30 yr fixed - interest rates are only going to go up from present values.
thanks everyone for the quick and awesome responses. I was hoping to not explain things more but apparently it will make things a little more clear. My wife bought our rental in 04 and for whatever reason was put into an ARM. It worked out great through the recession but now it's going up every year it will be at around 4.8 by end of year. This is actually better than what I could get refinancing it but it will keep increasing. The loan balance is less than what we would have to pay off on our primary residence to get it out of PMI. Wife wants to pay off PMI I want to pay off rental. I should include that we just bought our primary and we are in a market where it's seems that appreciation is out of control. Assuming this stays true for next couple of years my plan was to improve the primary residence and refinace in 2 years to get out of PMI. Sometimes I think I don't have to do much to home for value to increase its so hot right now. And the idea behind the rental is to hold on to it atleast until it makes sense to sell it.
Tim - contact present lender on the primary home mortgage to find out what the procedure / options are for eliminating the mortgage insurance ....just paying down the balance MAY NOT do the trick....... also ask them if you can pay for and provide an appraisal to get the PMI eliminated ......lastly depending on the rate and program you have on the primary home - you may not want to refinance this loan if you don't have to ....... summary - if you can eliminate the PMI for free or for the cost of a new appraisal - then you can do whatever you want with the funds you have to use
Eagle Home Motgage MLO WA 278613
@Tim Boeving Its not about $90 and $130, you have to count your deduction on your tax return. Will you get PMI deduction next year? Think about all the aspects so you have right decision.
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