I bought a house 2 years ago, but due to the current pandemic fears, I'm already refinancing my mortgage to get an interest rate that's a full percentage point lower than before (3.5% vs. 4.5%). I originally put down 20% of the purchase/appraisal price to avoid paying PMI. There's now a bit of a snag in the refinancing, since the new appraisal for the house came in a few percent lower than before. If I just transferred the loan balance, I'd be at 82% LTV under the new appraisal, and would have to pay mortgage insurance. The gap between the loan balance and 80% LTV under the new appraisal is roughly $15,000, and PMI would cost me about $1,500 a year. My normal payment would put me back at 80% LTV in a few years. The lower interest rate will reduce my payment by about $250/month, and PMI will eat up about half of that, for a monthly refinance savings of ~$125/month for the time I have to pay PMI. This is a 30-year loan.
My question is, is it worthwhile to pay an additional "down payment" of $15,000 at closing to put me at 80% LTV and avoid PMI? The way I'm thinking about it, I effectively will be paying 10% "interest" on that $15k over the next year due to PMI. In fact, it seems that as one gets closer to 80% LTV, PMI gets relatively more expensive - if you're even $1 over 80% LTV, you still need to pay the full PMI amount, the same as if you're at 90% or 95% LTV. At that point, it seems pretty clear you'd be better off paying the $1 as additional principal immediately, rather than saving it and being charged ~$125 for PMI that month. Following that logic, it seems that one might be best served by paying the mortgage normally when the LTV is high, but then paying a lump sum at some point when approaching 80% LTV to avoid the high ratio of PMI payment to payoff amount.
I have the money available to put into the mortgage, but have been putting it in other investments to get a better ROI than the interest on my mortgage - since investing in the stock market should get a higher return than my mortgage rate, it's better to invest than pay additional principal. But the PMI seems like quite a rub here - is my way of thinking about this as paying 10% "interest" (or more) on the amount over 80% LTV reasonable, or is there any other consideration to make? Since I don't expect a guaranteed >10% return on any other investment, is putting my cash into the mortgage the best option until PMI is gone? I'm also considering the practical aspects of starting with PMI, and then going through the hassle of getting it removed in a year or two, compared to the simplicity of just never having it in the first place.