The True Cost of PMI: Why you should pay down your low-interest mortgage(andrewbridges.org)
andrewbridges.org
The True Cost of PMI: Why you should pay down your low-interest mortgage
https://andrewbridges.org/the-true-cost-of-pmi/
18 comments
> If your mortgage interest rate is less than inflation, pay as slow as possible and let the inflation eat the principal
And if you’re going to save the difference. If you won’t, the mortgage is a decent forced-saving tool. (You also want to be sure you’re using a regional inflation measure that reflects your actual costs.)
And if you’re going to save the difference. If you won’t, the mortgage is a decent forced-saving tool. (You also want to be sure you’re using a regional inflation measure that reflects your actual costs.)
>If your mortgage interest rate is less than inflation, pay as slow as possible and let the inflation eat the principal
I'm not good enough at money math to work out why this makes sense.
I'm not good enough at money math to work out why this makes sense.
If you have a $200K loan (debt) today. If you paid it off today with a $50K/year salary that would be 4 years of work. If you paid it off in 30 years, typically salaries might be be $200K/year (because of inflation) so it would only "cost" 1 year of work. You can't actually wait 30 years to pay it all off, but by drawing it out, you get some of the benefit.
I see, so every time you pay the interest, you're losing x% of the loan in current dollars, but the loan is getting cheaper in real value by y%, where x is the interest rate and y is inflation. So despite paying more dollars overall by the end, you're paying less real value overall. I guess the risk is that y falls below x later, at a time where you would have paid it off if you had been doing extra payment, so you increase your payments, but maybe the change could be dramatic enough to undo the benefit?
You also get to write off the interest on your taxes, if you deduct. So the total “current dollars” is actually lower. It seems negligible, but is a real number to those with high incomes and high cost of living.
Because many teachers dont underatand that stuff and hace no incentive to learn it because they hace defined benefit pensions and job secyrity through seniority, atleast in my experience. Having teachers on a completely unrelated financial oath to thwir students is pretty actively detrimental.
>Apply for Removal: You can apply to have PMI removed if you get an appraisal showing that your loan balance is less than 80% of your home’s current value.
>I ruled out option #2 because appraisals are expensive. Spending hundreds of dollars for an appraisal, on top of paying for PMI, felt like throwing good money after bad.
Your mileage may vary, but for myself, in August of 2023 in Raleigh, the property valuation cost was $190. Check with your lender, or shop around for a different valuation company that they accept. My numbers were similar to those of the author: my PMI was $113.83 and my time for loan-to-value to reach 80% was about four years.
What I found was doing the property valuation and then investing the lump sum of cash put me ahead of the 10% 1-year return. The author can now take their $115 monthly savings and invest, but it will never yield nearly as much as investing the $32,000 in even the most conservative scenarios.
You can play around with some various scenarios in a spreadsheet or https://www.investor.gov/financial-tools-calculators/calcula...
>I ruled out option #2 because appraisals are expensive. Spending hundreds of dollars for an appraisal, on top of paying for PMI, felt like throwing good money after bad.
Your mileage may vary, but for myself, in August of 2023 in Raleigh, the property valuation cost was $190. Check with your lender, or shop around for a different valuation company that they accept. My numbers were similar to those of the author: my PMI was $113.83 and my time for loan-to-value to reach 80% was about four years.
What I found was doing the property valuation and then investing the lump sum of cash put me ahead of the 10% 1-year return. The author can now take their $115 monthly savings and invest, but it will never yield nearly as much as investing the $32,000 in even the most conservative scenarios.
You can play around with some various scenarios in a spreadsheet or https://www.investor.gov/financial-tools-calculators/calcula...
Yeah, I don't get it. Even if the appraisal cost $500 that represents 4-5 months of extra pmi payments. It's not clear from the article, but it sounds like the author might not have had the 32k sitting around liquid, so they probably ended up paying for these months anyway. If they took the 32k out of the market that's even worse. I can't imagine choosing option one over option two unless you're unsure if your house has gained enough value or appraisals cost many thousands of dollars. But then I can't imagine getting a house loan with pmi in the first place. This is why everyone says to put 20% down.
There are easier ways to do this from the beginning of your loan, like making sure you put 20% down and paying higher closing costs. If you tell your lenders that you refuse to pay PMI my experience has been that one of them will make it work.
There is some basic math literacy lacking in this article.
Assuming monthly compounding in both cases, in the 4% interest account case, the final balance is $1248.89, representing a net earning of $48.89 based on the compound interest formula. In the second case, one needs to use an amortization schedule and compare the difference in contributing an extra $100/month, versus not doing so. The difference isn't simply a 1% gain though, because one is paying slightly less interest on a shrinking principal over a 30 year period, versus earning 1% on a growing principal over a 30-year period.
For example, the return on paying down a mortgage with a 3% interest rate is 3%. If savings accounts are paying 4% interest, you’ll get a 1% better return by keeping your money in a savings account than by making extra payments on your mortgage.
Assuming monthly compounding in both cases, in the 4% interest account case, the final balance is $1248.89, representing a net earning of $48.89 based on the compound interest formula. In the second case, one needs to use an amortization schedule and compare the difference in contributing an extra $100/month, versus not doing so. The difference isn't simply a 1% gain though, because one is paying slightly less interest on a shrinking principal over a 30 year period, versus earning 1% on a growing principal over a 30-year period.
Also: mortgage interest is deductible, savings account interest is taxable at income rates.
> PMI protects the lender if the borrower defaults, but it provides no direct benefit to the borrower—yet the borrower pays for it.
You can say the same thing about mortgage interest: it provides no direct benefit to the borrower
You can say the same thing about mortgage interest: it provides no direct benefit to the borrower
TL; DR “While paying down a low-interest mortgage might not always make sense, the equation changes when you factor in the cost of private mortgage insurance.”
If you don’t have PMI, the conventional advice stands.
If you don’t have PMI, the conventional advice stands.
Also, they’re recommending paying down until you no longer need PMI, not paying off your whole mortgage.
I don't think this would've ended up on the front page without a contrarian clickbait title.
If the HN title included the bit of the article title that mentions PMI, it wouldn't be so clickbaity. @dang
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Unless you are paying insurance, in which case the (article’s) argument is that you end up paying more overall.
I have often wondered why high school math does not teach annuities and perpetuities, after all they are something we will absolutely all encounter as a car loan, mortgage or pension.