Pay down principal to avoid PMI?

**Petunia 100** · 05-05-2013, 10:06 PM

Originally posted by takeback View Post

We are refi'ing after being in our home for 8 yrs. Recent sales comps have hurt us a bit and the appraisal is coming in at 15% equity (appraised at 7k less than our purchase price).

The PMI will cost ~3k.

I was wondering if it makes sense to pull from an online savings acct and pay down ~11k to knock the principal on the current mortgage down to get at 20% equity and avoid PMI.

In my simple comparison I am losing 11k in savings @ 1% and avoiding 3k in PMI @ 5.24%.

The other part of the equation is part of that savings was earmarked for a roof redo on the house later this year. My savings will be short on the roof project if I use that $ for the principal now. Would it make sense to refi w/o PMI now and get a HELOC later for the roof (presumably at a lower rate than the PMI?)

Thanks!

That is a tough decision. If I were faced with it, I would want to know what sort of HELOC terms I could get. The best HELOC rates are those which are written at 70 - 80% LTV. Unless the value of your home jumps substantially in the coming months, you will not qualify for that. Most banks will not go higher than 80% LTV, at any rate. If you are stuck with a secondary lender, the terms are often quite high.

What about borrowing via a 0% credit card offer? How long would it take you to pay the balance in full?

Is the roof redo pressing? Does it need to be done this year, or can it be put off until next year? If you did put it off a year, would you have the rest of the money you need by next year?

**Slug** · 05-06-2013, 06:31 AM

All good thoughts from Petunia.

I hate PMI so I would be leaning towards the pay down if you feel like you have to re-fi now. My area has seen some recovery in terms of real estate prices. What's your valuation trend on Zillow like right now. If you think it might recover some, that could have an influence on the amount you would need to put in to avoid the PMI.

Speaking of influence, you can have an effect on your appraisal by providing your own data. See: http://sunkcostsareirrelevant.com/20...finance-diary/

**takeback** · 05-06-2013, 02:04 PM

Originally posted by Petunia 100 View Post

That is a tough decision. If I were faced with it, I would want to know what sort of HELOC terms I could get. The best HELOC rates are those which are written at 70 - 80% LTV. Unless the value of your home jumps substantially in the coming months, you will not qualify for that. Most banks will not go higher than 80% LTV, at any rate. If you are stuck with a secondary lender, the terms are often quite high.

What about borrowing via a 0% credit card offer? How long would it take you to pay the balance in full?

Is the roof redo pressing? Does it need to be done this year, or can it be put off until next year? If you did put it off a year, would you have the rest of the money you need by next year?

The HELOC is necessary if I pay down the principal with savings, and would then have >20% equity.... so if your situation holds the HELOC should work.

I hadn't considered the 0% card, good idea I'll check it out.

Originally posted by Slug View Post

All good thoughts from Petunia.

I hate PMI so I would be leaning towards the pay down if you feel like you have to re-fi now. My area has seen some recovery in terms of real estate prices. What's your valuation trend on Zillow like right now. If you think it might recover some, that could have an influence on the amount you would need to put in to avoid the PMI.

Speaking of influence, you can have an effect on your appraisal by providing your own data. See: http://sunkcostsareirrelevant.com/20...finance-diary/

I'm eager the jump on the current rates. I'm willing to wait out the value and see if a new appraisal down the line would be higher, BUT the current monthly savings with the refi is ~%300. If that new higher appraised value doesn't happen in 10 months I might as well pay the 3k now since I'll pay it in interest over that time period!

**Petunia 100** · 05-06-2013, 03:56 PM

Originally posted by takeback View Post

The HELOC is necessary if I pay down the principal with savings, and would then have >20% equity.... so if your situation holds the HELOC should work.

I hadn't considered the 0% card, good idea I'll check it out.

No, you'd be at 80% LTV already. So, what would you borrow? Your first mortgage plus your HELOC cannot exceed 80% with most lenders. Some won't let you exceed 70% LTV. Typically, those lenders which will go higher than 80% LTV charge high interest rates and a lot of fees. So, I'd start shopping for a HELOC with say a 90% LTV limit, and see what sort of terms are offered.

Even so, I think I would still lean towards using savings to avoid PMI. With good credit, you can borrow money rather cheaply right now. For you, the cheapest money available may not be a HELOC.

**takeback** · 05-07-2013, 08:56 AM

Originally posted by Petunia 100 View Post

No, you'd be at 80% LTV already. So, what would you borrow? Your first mortgage plus your HELOC cannot exceed 80% with most lenders. Some won't let you exceed 70% LTV. Typically, those lenders which will go higher than 80% LTV charge high interest rates and a lot of fees. So, I'd start shopping for a HELOC with say a 90% LTV limit, and see what sort of terms are offered.

Even so, I think I would still lean towards using savings to avoid PMI. With good credit, you can borrow money rather cheaply right now. For you, the cheapest money available may not be a HELOC.

OK I understand now (I was not including the HELOC into the total debt burden).

Thanks for the info I can see where you're coming from.
Matt

Pay down principal to avoid PMI?