If you are paying PMI on your mortgage, consider a lump sum additional premium payment for a decent guaranteed return

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I had not previously considered this as my PMI is not relatively high compared to my mortgage ($83 to $1610) however when I ran some calculations the savings were better than I expected.

Details:

If I continue to pay my minimum mortgage payment as I have been, I have 60 months of PMI payments remaining. This is assuming PMI automatically drops after the month that my balance drops below 80% of my purchase price.

I ran tests to compare different values of additional monthly payments until the PMI drops vs a lump sum payment next month.

To calculate PMI savings, I multiplied my PMI payment ($83) by the number of months that drop based on my additional premium payments. So if I pay $2000 next month and my PMI drops 10 months earlier than it would with no additional payments, my savings are 10x$83=$830

To calculate interest saved, I first totaled up the interest I would pay for the next 60 months. When I added my additional interest payment, I recalculated the total interest for those same 60 months. I subtracted the latter from the former. Obviously there would be additional interest savings for the remainder of the loan, but I don’t consider this our “forever home” so I didn’t want to go that far with it.

In the table I’ve linked it looks like with additional monthly payments my savings is about 5.2% annualized while a lump sum returns around 7% annualized. Not bad!

I need to look into this more to determine exactly how PMI drops off, for example if my mortgage company requires an appraisal to drop PMI then that would make a huge difference on the savings.

I have no high interest debt to pay off and I have a healthy emergency fund, so to me this a good use of extra cash if it works as I have calculated it. If you are in a similar situation, it is probably worth looking into.

submitted by /u/Flrg808
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Author: /u/Flrg808

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