# The Math Behind Paying Down a Mortgage with PMI

I’ve mentioned a few times that we bought our house with only 10% down and are currently paying Private Mortgage Insurance (PMI) on a monthly basis.  The PMI was necessary to get the loan because we didn’t have the standard 20% down payment required to get a traditional, non-PMI insured, mortgage loan.  One of our major short-term financial goals is to get rid of the PMI by making extra payments towards our mortgage principal.  Once we reach the standard 20% equity in our house, we can contact the mortgage provider and then completely remove that part of our payment for the rest of the loan (most likely after a new assessment of the property).  The PMI is purely a price paid for taking out a loan with less than 20% and provides no long term value to us, so removing that expense would permanently reduce our monthly expenses.  A recent comment asked why getting the mortgage up to 20% asap was a priority and I thought I’d take this chance to dive into the math and see what kind of return is possible by throwing extra money at a mortgage with PMI.

## Some Average Numbers

In order to calculate what kind of return paying extra on a mortgage with PMI gets, it’s easiest to talk about if we have some numbers to work with.

Here’s some run of the mill numbers to get us started:

• Home Cost: \$200,000
• 10% down payment: \$20,000
• Initial Mortgage Loan Amount: \$180,000
• Mortgage Interest Rate (30 year): 4.00%
• PMI Monthly Payment: \$75 (or 0.5% of the initial loan amount)

In this example, I chose the numbers arbitrarily, but they closely reflect what you will commonly find in today’s mortgage market.  Interest rates are in the 3.5-5% range depending on a number of factors, and PMI tends to range from 0.3-1.5% of the original loan amount.  Most mortgage contracts allow you to drop the PMI upon reaching 20% equity, or in this case, reducing the principal loan to \$160,000 by making a total of \$20,000 in payments towards the principal (including standard and extra payments).

Looking at a standard loan amortization schedule (fancy term that describes handling the principal in interest in equal payments for the entire course of the loan), the monthly payment for this mortgage comes out to \$859.35 for just principal and interest.  Most mortgage payments also include an escrow that pays insurance and taxes, but we’ll ignore that because that money has to be paid whether you have a mortgage or not.

## First, Let’s Look At No Extra Payments

If you decide to just make the standard minimum payment every month on the mortgage, it will take almost 6 years to reach 20% equity naturally!  That’s 68 monthly mortgage payments that include a \$75 PMI “fee” for a total of \$5,100, just for the privilege of getting the loan in the first place.  Now there are certain circumstances where putting less than 20% down makes sense (I think we made the right choice), but in general it’s probably best to avoid paying thousands of extra dollars if you don’t have to.

## What About Paying It Off Immediately

Now let’s look at the other extreme and pretend that right after you took out a loan with only 10% down, you happened to find another 10% (\$20,000 in our example) lying around.  Should you immediately pay down the principal to 20% or does it make sense to chase potentially higher gains elsewhere?  Keep in mind that removing the PMI with an instant payment is a completely tax-free, guaranteed return on investment.

First off, making ANY extra payments towards mortgage principal are essentially guaranteed gains at exactly the interest rate of your loan.  Traditional mortgages calculate interest monthly, so you will almost instantly start saving money on interest by making extra payments towards principal early.  While your monthly payment won’t go down, more of each payment will go towards the principal and the length of the loan will shrink accordingly.  That extra \$20,000 payment in our example will drop almost 6 years off of the 30 year mortgage and save ~\$38,678 in total interest payments over the course of the loan!

In addition, we will also save the \$75 per month in PMI we would have paid over the 68 standard payments it would have required to get up to 20% equity!  At \$900 per year, that’s an additional 4.5% return per year on our \$20,000 “investment”!

In total, we end up getting a 8.5% annual return on our \$20,000 investment over the course of the first 5.67 years of the mortgage.  After that point, the PMI would have been removed anyway and the money will continue to get a 4% return for the rest of the length of the mortgage via saved interest.

Tax-free, guaranteed 8.5% returns!  That’s going to be difficult to beat on any consistent basis (especially over 5+ years) so I would argue it’s a no-brainer to put that money towards the mortgage to immediately remove PMI.

## 4.5% Returns By Eliminating A 0.5% PMI payment? What?!?

At first glance, you might think the calculation was wrong if we ended up with a 4.5% effective return by eliminating a 0.5% PMI payment.  The trick is that the 0.5% PMI is on the entire loan amount of \$180,000, NOT 0.5% on the \$20,000 required to eliminate it!  \$20k is 1/9 of \$180,000, thus the actual return can quickly be calculated by multiplying the rate (0.5%) by the fraction of total loan amount over amount required to eliminate it (\$180k over \$20k = 9) to get the same 4.5% we calculated above.

Remember, this is in addition to the 4% returns obtained naturally by making extra payments towards a loan with an interest rate of 4%.

The numbers get even crazier if we talk about lower initial down payments and higher PMI rates.  For example, putting 5% down with a PMI rate of 1% would equal extra returns of 6.3% (total of 10.3% if we assume the same 4% loan) if you could instead start the mortgage with a traditional 20% down payment.

In other words, don’t take out a loan with PMI if you don’t have to!

## How About Somewhere In The Middle

What about the more likely example of having a little extra left over each month to either put towards PMI or invest in a taxable account?  (I won’t get into PMI versus tax-advantaged accounts, but you should definitely max out your employer match first regardless of whether or not you have PMI.  After that, it will be a slightly different calculation versus the one below on tax-advantaged versus extra mortgage payments).

Let’s say after adding up all of your expenses and the money you’re putting away in tax-advantaged accounts like 401k’s and IRA’s, you have an extra \$500 per month.  Should you put it towards the mortgage in the form of extra principal payments or invest in broad-market index funds via a taxable brokerage account?

By adding the \$500 surplus to our monthly mortgage payment, we can actually get up to 20% equity and remove PMI after just 25 payments!  That means we would save the \$75 PMI payment for each of the remaining 43 payments it would have taken to remove the PMI naturally, for a total savings of \$3,225.  With the additional \$2,375 saved in interest, the total return for making 25 extra monthly principal payments of \$500 comes out to \$5,600 over the course of 68 months.

If we would have taken those extra \$12,500 in principal payments and invested them in a taxable account instead, where would we be at after 68 months?  By compounding an average return of ~6.17% annually on a monthly basis (0.5% per month), the investment would be worth \$16,620.97 at the end of 68 months for a total gain of \$4,120.97.

The \$4,120.97 in gains is less than the \$5,600 saved by making extra mortgage payments over the same time frame AND will potentially be taxed as capital gains when withdrawn!  If you expect to receive ~6% annual return on your outside investment, it definitely makes sense to instead take the guaranteed return of paying off the PMI early!

What if you expect better returns?  To break even on gains versus amount saved, you would need to get 7.8% returns BEFORE taking into account taxes.  If you assume a 15% capital gains tax, you will need to get an almost 9% return just to break even versus the extra mortgage payment strategy!

These return numbers certainly aren’t crazy considering the S&P 500 has returned close to 10% per year since inception, but you have to keep in mind that the returns from paying off the PMI early are guaranteed and tax free!

## Calculating Your Own Payoff Rate

The actual return you can expect to get from making extra mortgage payments to remove PMI will vary depending on what % of the loan amount your PMI is (the example used 0.5% annually) and how much extra you are able to contribute towards it each month.  You will ALWAYS get a return equal to your interest rate for the life of the loan PLUS an additional “return” for removing PMI earlier than you would have naturally.

I worked backwards using amortization tables and excel to obtain the various numbers above, but maybe someone smarter than me can come up with a slick formula to calculate exactly how different extra monthly payments translate into effective return on investment.  It will always end up somewhere between your overall loan rate and the maximum return calculated above of:

Loan Rate + PMI Rate * (Total Loan Amount / Payoff Required)

## Two Birds With One Stone

In our case, we decided the benefits of eliminating PMI out-weighed putting extra investments in taxable accounts and have been making extra payments on the loan since we got it.  In addition, my year end bonus actually puts us in a situation where it’s possible to make a large lump-sum payment to get up to 20% equity right now!  As removing the PMI with our current loan provider would require an assessment anyway, we thought we’d look into refinancing our entire mortgage at the same time.

One of the larger costs of refinancing is the assessment, which we would pay anyway to remove PMI, so why not see if we could reduce our interest rate at the same time?  Interest rates have fallen about half a percent in WA since we got the loan about a year and a half ago, so trying to lock in a lower rate probably makes sense despite the costs that go into refinancing.  A quick calculation shows we’d make up the cost of the refinance in a fairly short period of time.

After some back of the napkin math showed it made sense, we looked a little deeper, called around for some quotes, and are amidst the refinancing process as we speak.  Assuming the assessment comes back as expected, it looks like we’ll be able to knock ~\$350 off of our monthly payment thanks to the combination of eliminating PMI and reducing our interest rate at the same time!

Stay tuned to future posts to see exactly how a bunch of new credit cards on each of our credit reports impacted our interest rate! (Hint: It wasn’t a zero impact)

## 32 thoughts to “The Math Behind Paying Down a Mortgage with PMI”

1. Carl says:

Noah,

I’ve gotten out of the PMI BS twice the same way of checking again after my equity ROSE due to increased valuation. It was a simple matter to talk to my mortgage people and have it reassessed and once I could show I was over 20% equity due to valuation, they knocked off the PMI.

Not sure this will apply today and to you, but the last one was here in WA state. Might be a way to drop the PMI and invest that extra bread elsewhere if you choose.

1. Noah says:

That’s exactly what we’re doing, the re-assessment might put us at 20% equity already which means I’ll most likely move the cash into index funds. If they determine we’re not at 20% yet, we can put cash in to get us up to that level. Either way, it will be nice to start saving the money monthly once we finish the process. Hopefully there aren’t any hiccups along the way

2. Denise says:

It’s nice to see your in depth explanation on the matter. I applaude you for the steps you are taking towards financial freedom.

1. Noah says:

Thanks for reading! Reaching FI is definitely a one step at a time kind of goal.

1. Noah says:

Great tip!

If you qualify for the PMI tax deduction AND would have itemized your deductions anyway, the return isn’t quite as high as I detailed above. Along the same line, if you’re deducting your mortgage interest as well, the effective return of your interest rate is slightly reduced as well. Keep in mind it’s not as simple as multiplying the interest rate by your marginal tax rate in most cases because the mortgage interest deduction might be the only reason you are itemizing in the first place.

Looking at potential tax savings is important when looking at the overall picture, but don’t fall for the common trap of thinking deduction equals tax savings. This is a common misunderstanding I’ve seen before.

In other words, don’t give the bank \$100 just to avoid giving Uncle Sam \$25, you’ll still be out \$75!

Hi Noah, I’m still trying to figure out how to achieved these numbers but let’s go with your final number. So you are saying if you pay 20k extra in the beginning you save 38k over the course of 30 years. Let’s assume you consistently get 2% back every year. In 30 years you get ~36k back (= 20k * 1.02 ^ 30). This is very close to your 38k. 2% is very achievable I believe. There are taxes too but 2% is very low I think.

1. Noah says:

I focused on the return only during the years PMI would have been involved (68 months = 5.67 years in my example). After that point, you will have 20% equity (assuming the property doesn’t change in value) and the “returns” go back to the interest rate (4% in my example). I didn’t go beyond this point, because there are a lot of other things you can do beyond 20% equity (such as cash-out refinance) that allow you to access the money in a liquid way at a standard mortgage rate. The decision at that point is whether or not you think you can get better returns than the interest rate

If we wanted to calculate return over the course of the loan though (which makes sense for anyone who doesn’t plan to utilize their house’s equity for other ventures), you made a couple mistakes in your numbers. First, making that 20k payment at the beginning not only saves ~\$38k in interest over the course of the loan, but it also reduces the length of the loan to 24ish years. It also saves the \$5,100 in PMI payments over the first 68 months.

Second, the \$38,678 and \$5,100 are both gains on top of the \$20k investment, not the final value of the investment because you still get the \$20k as equity in the house. To make an apples to apples comparison, we need to see what gains are required to end up with \$63,778 (\$38,678 + \$5,100 + \$20k) on an initial investment of \$20k after 24 years.

Working backwards from 63,778 = 20,000 * (1 + X)^24 gives us a result of X = 0.0495 or returns of ~5% to break even.

I still think it makes sense to only look at the returns over the 68 months that PMI would exist normally (for a return of 8.5% annually), but I could probably be persuaded otherwise.

4. anthonyjh21 says:

Oh man, I’m going through this right now. I have to get to bed so I’ll follow up later, but a few quick points. You can request they remove PMI at 80% but they are not legally obligated to. Sadly, it’s only at 78% LTV that they are forced to remove PMI. As far as using market appreciation (w/o structural improvements) for years 2+ IIRC it must be based on 75% LTV. This all assumes you have a conventional loan or bought before the new requirement for FHA loans to have PMI included for the life of the loan which I believe was some time around 2012-2013.

1. Noah says:

I believe the 78% LTV ratio is when providers are required to remove PMI and I think this typically happens automatically without requiring an appraisal (but probably varies by company). On the other hand, you can request that they remove it at the 80% LTV mark which I understand typically requires an appraisal with the cost coming out of your pocket.

I’ve never heard about the 75% LTV rule for market appreciation, do you have any more information on that?

For us, we’re kind of circumventing the whole removal of PMI by just bundling it in with a refinance where the new loan will be 80% LTV (or better) from the start. This makes sense for us because interest rates have dropped since we got the mortgage, but obviously wouldn’t work for everyone depending the the rates available.

For the case of the permanent FHA insurance, refinancing is always an option, but you’ll have to weigh the costs and possible different interest rate versus just paying the PMI.

5. joE says:

A good example of how great credit can save you thousands, more so than MSing, is when you apply to get a Piggyback loan, aka 2nd mortgage loan. Assuming a 10% down, instead of getting PMI to cover the other 10% to get you to 80/20, you can get Piggyback loan. Compared with PMI your monthly payments will be lower, all your payments are creating equity for you and not some insurance company, they are tax deductible at the end of the year and you never have to bother with getting PMI removed from your loan which is/can be a huge headache.

To qualify for a Piggyback loan however you can’t just have decent scores you need great scores. For example if you can get the best mortgage rates with 720+ scores, you’ll need more like a 760+ scores for a lender to feel comfortable to give you the Piggyback loan since they are taking a bigger risk by you only putting 10% down instead of getting PMI.

MSing sites unfortunately never educated their readers about the effects of opening so many credit cards, churning etc. they just rave about how many points you can get with the sign ups and churning.

Imagine the amount of money someone can save over a 30yr mortgage if not only they could get the best rate but not have to purchase PMI and invest the monthly savings towards becoming FI.

I really like your site NOAH for the fact you educate your readers on the big picture and not only in alternative methods of income. Keep up the good work.

1. Noah says:

Thanks for the detailed comment! Piggyback type loans are worth looking into for anyone considering putting less than 20% down towards a house.

Looking at the bigger picture (credit score and otherwise) is always important to make sure you’re not wasting your time/money. Saving \$4,000 on a trip to Europe while costing yourself \$8,000 in interest and PMI on a standard mortgage certainly isn’t the case for everyone, but I bet there is a good number of people out there doing it without even realizing the tradeoff they’re making.

6. Ray Morris says:

It’s even better. You don’t have to choose between gains from investing the \$500 versus using it to pay off the PMI. You can get the advantages of BOTH. What you can do is invest \$500 per month for three years. Suppose you get an 8% return during this time. So you put in \$18,000 and earned \$3,000 more on your investment. Now you have \$21,000. You use that to pay the mortgage below 80% all at once. You get rid of PMI in three years instead of six, AND you’ve received the \$3,000 gain by investing the money until you have enough to bring the mortgage below 80%.

1. Noah says:

Given a standard short time frame between now and being able to pay off PMI (<10 years), it's a gamble that your investment will come out ahead. Just like any money you intend to use in a relatively short time frame, it's probably best to keep it out of the market unless you're feeling particularly lucky.

In your example, if you do happen to get 8% annual returns for 3 years then you do come out ahead by pulling it out to get to 80% LTV all at once with a lump sum principal payment. Sometimes it will work, sometimes it won't. I'd probably stick with the guaranteed returns in a 3-year timeframe myself.

1. Ray Morris says:

There is of course a risk, gains could be higher or lower. But actually long term the risk is extremely low, because it’s not really one choice with a three to ten year time frame. It’s a series of thousands of similar decisions over decades.

I figure I take a risk maybe four times a day. Speaking up in an important meeting, a financial decision, whatever. That’s 1,400 chances each year. What that means is that if I tend to make choices where the odds are in my favor, after 1,300 such choices in a year, I’ll almost certainly come out better than if I had a policy of making choices that are likely to be less favorable. The sheer number of choices override “luck”.

Investing money is likely to be a profitable choice, a “good risk”. Having a policy of taking “good risks” is will win in the long term. Therefore my policy is to take the risk if a) the odds are in my favor and b) I can afford the consequences if it goes badly.

1. Noah says:

That’s an interesting perspective, but I think it’s flawed in that the impact of any given decision must be weighed. It doesn’t matter if you made 4 “good risk” choices if a loss from 1 of the 4 outweighed the benefits of the other 3 by itself.

In the case of choosing whether or not to pay off PMI early, this is a decision that most people make once in their life (if at all). If you’re making a choice that represents a good chunk of your net worth, I certainly wouldn’t take 51% odds every time just because it’s more likely to occur.

I don’t know if you’re familiar with the Kelly Criterion (the “optimal” betting strategy), but it could be applied here to weigh the amount of risk you’re taking with the amount at stake to see if it’s an effective bet (won’t set you back more than you can handle), which you alluded to with being able to afford the consequences.

1. anthonyjh21 says:

Well said. As a former professional poker player I’ve heard Kelly Criterion thrown out there a lot and you pretty much nailed the reality of risk vs reward. Bottom line, don’t risk more than you can afford to lose no matter how well the odds are in your favor.

I’ve personally had many opportunities to play high buy-in poker games and refrained because it represented too significant a portion of my bankroll. Sure, it was a +ev opportunity but the downside was too costly.

I do understand what Ray is saying here though. As your sample size increases so does the likelihood that 51/49 will eventually run in your favor. While this may be true, as you noted, we’re discussing large sums of money and a situation (PMI) that we’re unlikely to encounter many times throughout life. If we had the kind of money required to iron out variance then we wouldn’t have PMI in the first place. You can’t (shouldn’t) gamble with such things just because you think there’s a pot of gold on the other side of the rainbow.

In fact, it reminds me of someone commenting on MPD blog recently. The person wanted to MS and pay off a chunk of their principle on the mortgage (with a 5% card IIRC) and were counting on an upcoming PayPal releasing of funds owed to them (I’m assuming the 180 day deal).

I think you know where I’m going with this. When we are discussing PayPal, the only thing they’re consistent about is not being reliable. Do you really want to rely on funds being released AFTER you’ve already committed that money elsewhere? PayPal may very well release the funds on time 3 out of 4 times and you turn a nice profit. But what happens if there’s another delay because of (insert BS PayPal justification) that other 1 time out of 4? Was it worth over-leveraging yourself for that extra cash back from a credit card promo?

7. Ray Morris says:

Thanks for the interesting discussion, gentlemen. I found the Kelly criterion interesting.

I suppose the two things that Noah and I see differently are that a) I don’t see it as a rare event. He’s thinking “will investing THIS money THIS year possibly lose?” while I think “should I invest any available money EVERY year?” ; and b) I estimate the risk of losing significant money in an index fund to be very low.

1. anthonyjh21 says:

Logically, you only have PMI because you feel the prudent thing to do is to not over-leverage yourself and fork over another \$20k to have it removed/waived. While in theory you’re correct that the law of averages could very well prove that investing that money elsewhere will yield a much higher return you can’t dismiss the fact that this is in fact a rare circumstance. We can’t do this every day, or month or even every year. Further, within the context of this discussion \$20k is a large sum of money that we can’t afford to lose.

When I have discussions with people who don’t understand poker I tell them it’s only gambling if you’re wagering money you can’t afford to lose AND don’t have enough of a sample size to reduce variance.

If you have \$10k bankroll and wager \$8k of that into a single poker tournament where you anticipate a 50% ROI it’s still a bad idea to risk an 80/20 all-in hand when you can’t recover in the event that you lose, which will happen 20% of the time. I’m giving this example to illustrate the fact that even when you’re a huge favorite, you’d need to run this event over and over (and over) before you’d get anywhere remotely close to the return you’re expecting. Losing this \$8k tournament would cripple you, regardless of the huge potential for return.

1. Ray Morris says:

> within the context of this discussion \$20k is a large sum of money that we can’t afford to lose.

I would be more concerned about the nuclear obliteration than the money. Unlike poker tournaments, nobody has ever lost all of their money in an index fund. To lose all \$20,000 by saving your PMI-payoff money in an index fund would require that all of the country’s100 largest companies vanished overnight, and this happened the day before you cashed out the fund to pay down the mortgage. For your investment to be worth zero, all of the big companies would have to suddenly be worth zero – in other words, nuclear Armageddon. In which case PMI is the least of your worries.

If the market had a really bad year, you could reasonably have a 10% loss halfway through, when you have \$10,000 in the account. That would be a loss of \$1,000. Personally, for am EV of \$3,000, I can handle \$1,000 potential loss.

> You can’t dismiss the fact that this is in fact a rare circumstance. We can’t do this every day

We can do this every day that we have a mortgage. It’s a choice between a guaranteed 3.5% return by not paying mortgage interest, or an unknown return averaging 8.5% in the market. We’ll have this exact same decision to make in any month that we have a mortgage. Note that the PMI goes away at almostbthe same time either way. (Probably a few months sooner if you choose the index fund, so that doesn’t effect the calculation much.)

This discussion is going on far longer than I expected, but it’s interesting.

8. My Pmi runs around 1.2%. Where did you get .5?
Of course my rate is a 2012 FHA rate before Obama scammed everyone with his .8 for life of FHA loans.

1. Noah says:

0.5% PMI annually was the amount on our own traditional housing loan, but it varies by lender. Right now certain companies are advertising only 5% down with no PMI, but I imagine they are compensating with a higher interest rate compared to someone that can put the full 20% down.

9. BR says:

I think my pmi is 2%. Didn’t do math yet. F H A
\$161 0n about on \$756.00 payment
Thinking of paying extra monthly to get rid of it

1. Noah says:

Be sure to check the terms of the PMI on your loan. I don’t believe most FHA loans allow you to remove the PMI for the life of the loan, regardless of the equity % you have paid down. In that case, you may need to refinance in order to remove it, probably after you reach the 20% threshold.

2. anthonyjh21 says:

If I recall correctly it was in 2012 when the change occurred requiring PMI be permanently attached to FHA loans. If you bought 2012+ then you might be out of luck and have to refinance as Noah suggested.

10. Tim Jagger says:

I do have a question…I’m paying \$250 extra per month towards principal, paying \$125 per month in PMI and it this rate, I’ll be at 80% in year and cancel PMI. If I want to get rid of PMI today, I could pay \$10k today to get to 80%, which would save me \$1500 in PMI premium. Or I could pay for an appraisal since the value of my house is way above my loan amount and get it waiver that way (my only concern is that need to rely on a bank approved appraiser ). Thoughts??

1. Ray B Morris says:

@TIM JAGGER
“I could pay \$10k today to get to 80%, which would save me \$1500”.
It’ll also lock up that \$10,000, until the house is sold or the mortgage paid off. Since you’d get \$1,500 back within a year, let’s simplify and call the immediate. Basically you’d be investing \$8,500 and avoiding interest payments of your interest rate X 1.17 (multiplied by 1.17 because you’re avoiding on \$10,000 by paying \$8,500). If your mortgage is at 3.9%, that’s essentially a risk-free, illiquid investment paying you 4.6%. That’s not bad at all, if you don’t mind having that money locked away.

Regarding the option of paying for an appraisal now, if your home has appreciated quickly double check your mortgage documents – you may not be able drop PMI based on an appraisal in the first few years of the mortgage. Otherwise, this option is all about the risk of the appraisal not coming back where you need it. Without more details about the home and what comps will support the higher value, along with your risk appetite, it’s difficult to help. If yours is an average home in your subdivision, and several nearby homes have of similar size and age have sold recently in the neighborhood, that’ll support an appraisal at a price similar to the comps. If your home is unusual for the neighborhood, an appraisal is less predictable.

2. Noah says:

Hey Tim, if you’re really confident that your house will appraise upwards to allow the removal of PMI without any extra payments, then your “profit” will be \$1,500 minus the cost of the appraisal.

On the other hand, if you just pay the \$10k now and can remove the PMI right away (it’s worth confirming you don’t also need an appraisal for this path), then you have to look at what gains you are potentially giving up by “locking up” that \$10k.

I would take the interest rate of your loan versus what you expect to get investing the money elsewhere (if you’re not going to invest it elsewhere, then put it towards the loan). The difference in the two rates against the \$10k multiplied by the number of years left in your loan should give a number to compare to the first one calculated above (\$1,500 minus cost of appraisal).

Sample numbers:
27 years left on mortgage
\$500 cost of appraisal
4% interest rate on mortgage
7% expected average return in the market (or other investment)

First option: Pay for appraisal (if really confident it will get you to 80% LTV) = \$1,000 profit (\$1,500 – \$500)

Second option: Pay \$10k towards mortgage now (versus \$3k over the next 12 months)
Gain of \$1,500 by removing PMI early
Gains via saved interest (\$10k x 1.04^27 – \$10k) = \$18,833
Loss by not investing the \$7k (\$10k – \$3k via current schedule) = (\$7k x 1.07^27 – \$7k) = \$36,497
Expected LOSS by paying an extra \$10k now = \$16,164

Of course there is the third option of just continuing with your current extra \$250 per month and removing PMI after a year. You don’t avoid the \$1,500 up front, but you also don’t have to lock away an extra \$7k in order to do so. With the random sample numbers I picked, that seems to make a lot more sense than paying \$10k now, but your result might be different after plugging in the real numbers. If you’re confident you can get an appraisal above 80% LTV right now, then that seems to be the best option.

11. Liane Tomlinson says:

Hi. I know this is an old thread, but I’m hoping someone can answer a question for me. I would like to get an appraisal to have PMI removed. From the home values in the area, I’m very close but am not certain I’ll quite make it. Suppose you get an appraisal and you come up \$2,000 short, can you just go ahead and pay \$2,000 to your principal after the appraisal and have PMI removed? Or does the 80% have to be met before the appraisal.

Thank.

1. anthonyjh21 says:

This is almost exactly what I had to do. We wanted to use home appreciation as a means to hit the 78% LTV requirement but fell \$2,700 short on the appraisal alone. We weren’t interested in paying for another appraisal seeing as we were still shocked at how utterly useless the first appraisal was. The bank wouldn’t budge on the extremely low-ball appraisal but did give us the option of sending a one time payment towards the principal to combine with home appreciation to meet the 78% LTV requirement. We sent in a check and about a month later PMI was removed.

It was a pain in the butt overall but then again I had to deal with Wells Fargo (loan sold to them) so YMMV. All in all I’d do it all over again in a heartbeat. Between it being a waste of money and a huge hurdle with the new standard deduction it’s one of those things you want to rid yourself of asap. The ROI on that \$2700 payment was better than I’d find elsewhere!

1. Liane Tomlinson says:

Thank you, Anthonyjh21, for your reply! I’m going to go for it! I know I’m realllllly close. I appreciate you sharing your experience.