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Details:

  • Origin loan: $152,000
  • Original downpayment: $8000
  • Remaining loan: $144,000 (= approximate current pay-off quote)
  • Currently value of house: $160,000 (assume value hasn't changed since I bought it)
  • Loan interest rate: 4.125%, 30 yr, fixed
  • Loan type: LPMI
  • Current monthly payment: Required - $886, Paying - $1000 (extra 114 goes towards principal)

I have around $34,000 in stock options from work, but that could be considered savings for all intents and purposes (I have a separate $4000 in a savings account, and around $7000 in other debt that is currently at 0% interest).

My question:

Questions:

  1. Would it be better to use the $34,000 (all or some) to get to 20% of the mortgage, so I can refinance out of LPMI?

  2. Does it help at all in taxes, especially with the new laws, to do one or the other?

Note: I don't know if I want to hold on to this house forever, so if the answer depends on this decision, please feel free to suggest for both possibilities.

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Firstly, congratulations on being in a position to pay down extra on your principal on a regular basis. It's a great way to knock that mortgage loan out of the way.

I'm going address this as a purely re-fi question first:

I presume that with your LPMI loan, you opted for a higher interest rate in order to bundle in the mortgage insurance in.

Currently (12/21/2018), Freddie Mac reports the 30-yr mortgage rate is 4.62%: http://www.freddiemac.com/pmms/

It generally costs between 2-6% to re-fi a mortgage loan, so the rule of thumb is that if you can lower the rate by 1%, it might be worth it financially: https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/

Given only these points of information:

  • assumption that LPMI loan has higher interest rate than conventional loan at your current lender
  • current loan interest rate
  • current mortgage rates

It doesn't sound like it would be worth your trouble to re-fi out of the LPMI loan, especially if you're not going to stay in the home long term.

From a tax perspective, you'll be able to deduct the interest from your taxes provided that you are itemizing. With the newer higher standard deductions of $12K single/$24K married (https://www.irs.gov/pub/irs-pdf/p5307.pdf, pg 7), it might not matter.

Outside of getting rid of LPMI and taxes, there's a third topic to consider: monthly cashflow vs emergency fund. If you re-fi (using partial or all stock options), you might end up with a lower monthly payment, which may ease things throughout the year. This will depend totally on the new principal amount (it will be lower) vs what rate you get. A new loan at $132K @ 4.62% looks to be about $745/mo (if you have an escrow account for $800 property taxes, value I used to mimic your current payment). This lower monthly payment will come at the cost of any potential emergency funds that you may have (or want to build up).

If I made a bad assumption, let me know and I'll re-visit this.

Hope that helps.

  • Thanks @Allen! It sounds like it's not worth it. Couple of questions: my escrow (taxes + insurance) for the year is about $1800. How would that affect my new monthly? Also, how long would I have to stay at this place, before LPMI becomes "not worth it" (if there is such a timeline)? I've lived here since Apr 2016 – Is It Me Dec 27 '18 at 14:49
  • You're welcome! For any re-fi, I expect the escrow to be similar (the lender will do an escrow analysis based on your previous insurance and property taxes and then base what it should be for the next year). – Allen Dec 28 '18 at 19:32
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    So the monthly payment would really be whatever the new underlying loan will be. Regarding "not worth it": usually folks will re-fi if it lowers their payment. For example, if re-fi costs are $2000 but you lower your payment by $100, it would take you 20 months to recoup the costs before you're ahead. You can bank that $100 or apply it towards principal for faster loan pay down. You should view this spreadsheet: vertex42.com/ExcelTemplates/loan-amortization-schedule.html and this mortgage calculator: bankrate.com/calculators/mortgages/mortgage-calculator.aspx – Allen Dec 28 '18 at 19:42

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