When we purchased our home, the mortgage that we locked into had a rate of 4.375%, a conventional loan lasting 30 years. Since we did not put down 20%, the dreaded PMI was tacked on. Our mortgage broker told us that in two years we can get rid of it. What a fat lie.
Private mortgage insurance is an insurance that the bank takes out against you because you failed to put down 20% of the purchase price as a down payment. If we were able to put down the full 20% of the sale price with the bank covering the remaining 80%, should we default on the loan, the bank would sell the home and make back their 80% AND gain our 20% deposit. Now, as we did not have that 20%, the bank takes out that insurance on us to make up the difference in case we default. Per our broker, after a two year period, we make a call to the bank, tell them it's been two years and they'll get rid of the PMI portion of our mortgage. In our specific case, it's $100.04 per month or $1,200.48 per year.
Makes sense? No, it's still confusing and a waste of money for us. So where's the "big-fat-lie"? It's been 3½ years since we purchased our home. I contacted the bank and naively asked for the PMI to be taken away. The bank said, "Hold on a second, not so fast....you have to prove the value of the house is high enough to surpass the debt to value ratio of 80%." "How do we prove that?" was my response.
The answer is annoying. The bank will hire a real estate appraiser (who we pay for) that will compute the value of our home. Take the balance of our mortgage principal (the amount left on your mortgage) divided by the value of the home (per the appraiser). If the number you get is equal to or less than 0.80, then you've surpassed the 20% threshold and the PMI can be taken away (assuming that 2 years have passed, of course).
Ok, so how does this look for us? Well...
We purchased the home for $275,000.
We made a down payment of $30,000 (10.9% of the purchase price).
The loan from the bank covered the rest at $245,000.
Since we were less than 20%, the bank charged us PMI at $100.04 per month.
It's been 3½ years, so we are past the minimum 2 year "wait" period per the bank.
After 3½ years of mortgage payments, we've paid approximately $83,000 to our bank.
Breakdown: $21,000 was for property taxes, $4,200 went to PMI, $24,200 went to the principal and $33,600 went straight into the trash (I mean interest charges).
After paying $83,000, our mortgage dropped from $245,000 to $220,800, that's it. Our home would have to be worth $281,250 today for the debt to value ratio to be 80% or less. If not, I would have to pay more to the principal to make up the difference or walk away and continue paying the mortgage as is.
Now here's the point of this post. If I get rid of the PMI and I refinance the mortgage from a 30 year down to a 15 year term, since the interest rate is much smaller than our current rate, we would save approximately $160,000 over the course of 15 years while paying roughly $300 more per a month than what we are paying now. Doesn't that just sound awesome?! I've started dreaming in my head.
The process for refinancing the mortgage is very similar to the removal of the PMI (which is how this whole process came to light). I searched for banks with the lowest rates and found a small local bank offering 2.89% on a 15 year mortgage. I contacted them, filled out the mortgage application, spoke with the broker who asked that I pay $410 for an appraiser to appraise our home. With a refinance, the bank needs to see how much we're asking the bank to cover versus how much our home is worth now. We paid the fee and prepared for the appraiser to come. I made a list of all the work done on the home since our arrival. I was shocked to realize that we've spent $45,000 on repairs and upgrades since 2011 (tack that onto what was paid to the mortgage and you can see why these homes are money pits)! I also included a list of our area's attractions, after all, real estate is all about location, location, location, right?.....WRONG!
When the appraiser came, we gave our list to him, he toured our home, took a few lousy photographs and left. The whole encounter lasted less than 30 minutes.
About a week past by before the appraiser submitted the all important number. The whole time waiting for him, the interest rates hadn't changed, that is, until he submitted his documentation. By this point, the rate had jumped to 3.0% (gee... thanks for taking your time).
Drum roll.... the appraiser "computed" our home's official value at $276,000. Yes, that's right, its worth only $1,000 more than what we paid for it in 2011 (appraised then at $283,000). Dumping in another $45,000, I was hoping our home's value would've been around the $300k mark. What a major disappointment. The bank told us that we'll have to pay $4,200 to make up the debt to value ratio. I can't get rid of the PMI nor can I even refinance without dipping into our last bits of savings. After our recent lead abatement (future post), you can imagine angst.
I just have no luck.
If a banker and/or an appraiser happen to read this blog, please consider these factors:
1. Make sure the appraiser is from the area that the home is located. It doesn't make sense to have an appraiser totally unfamiliar with the area make an appraisal.
2. When appraising, if the local inventory of HISTORIC PROPERTIES is limited, perhaps you should open the field to get a better understanding of the home values around the entire region, not just a pin point on a map.
3. Don't use the ONLY historic home that sold recently as a basis for my home's value. These homes vary greatly in condition and with a limited inventory, using only one valuation is not a true indication of value.
---------------------------------- two weeks later -----------------------------------
So we sat on this for a couple weeks or so. I was, quite frankly, pissed. The appraiser took his time, the rates had surpassed 3.0% and we would have to pay several thousands of dollars to avoid the PMI. Once I got over it, I checked the rates again. They had dropped. With the FED doing their usual dancing and freaking out the markets, I was pleasantly surprised that the rate dropped a bit. My wife and I discussed our finances and decided to continue with the process. We locked in the new rate, moved money around and now have a 15-year refinanced mortgage.
Current mortgage is as follows:
Term: 15-year, 180 payments
Total Due at Closing: $7,704.98 (includes down payment to remove PMI, escrow startup, legal fees and bank fees)
Home Insurance was removed from the mortgage (per the bank's policy, weird), restructured and paid on an annual basis. Altogether, the home insurance dropped. The new biweekly mortgage amount became $966.41 with an anticipated end date in 2028 (yes, that's less than 15 years, exciting!).
Can't wait to be mortgage free...
I've updated our Expense page to reflect the new mortgage.
I've got an old high school friend working "on Wall Street". That is to say, he works in NYC with the financial markets. He advised me that paying off the mortgage is a bad idea. I would be loosing out on the annual tax deduction and I could make more money in the markets instead of putting the cash towards the mortgage. To all of you whom feel compelled to say the same thing to me, here's my response:
1. I suck at investing, I obviously live in a "money pit". Though as much as I try to learn anything in finances, I only win by pure luck rarely and fear loosing money all the time. So going into the markets isn't an argument for not getting rid of the mortgage.
2. Taxes... really? I'll be honest, my wife and I receive roughly $2,000 to $3,000 a year of our own money back from Uncle Sam. If our mortgage was $2,000 a month and is now paid off, I would be saving $24,000 a year (minus property taxes) of, again, our own money. I'd rather loose the annual tax rebate from our mortgage interest and gain an extra $20,000+ in cash every year (which I can place into investments, home repairs, add to retirement, etc). Opportunity costs being what they are, we're still putting money into our retirement accounts as well as college savings for our children.
3. When our mortgage is paid off, my wife and I will be in our mid to late 40's, my son will be almost 18, his sister 15. I'll need to prepare for their college education as well which I estimate will be $30k to $50k per year (if they're not going to Harvard/Princeton/MIT/etc).
I hope my logic makes sense to some.