Who wouldn’t want to reduce their monthly mortgage cost? This article reviews two ways that you may be able to accomplish this: getting a lower rate and eliminating your PMI (Private Mortgage Insurance).
You may have read that the Treasury yields have been dropping. The 10-year rate began 2019 at 2.66% and had dropped to 1.52% in late August. This might matter to you because mortgage rates are tied to this bond rate. So, as the 10-year Treasury rate drops, so do mortgage rates. The average 30-year fixed mortgage began the year at about 4.7%. In late August, it was around 3.85%. This reminds us that it’s a good time to check the cost of our current mortgage. You might be able to decrease your monthly loan payment and save significantly over the life of the loan. The details of how to evaluate refinancing were covered in a previous article (Should I Refinance My Home?) and I encourage you to reread it as the fundamentals remain the same.
You may not be quite as familiar with Private Mortgage Insurance (PMI). It’s an insurance policy that helps to protect your mortgage provider if you default on your loan. These institutions have figured out that if they have to seize your property and if you home equity value isn’t at least 78% of the loan amount, they might lose money. Their solution is to protect themselves with insurance. PMI payments add between 0.55% and 2.25% to your monthly mortgage payment. And guess who pays for this insurance – correct, it’s you.
If homes have appreciated in recent years where you live, the appreciation will have increased your home equity and that may put you closer to the magic 78% threshold. Let’s take an example to clarify this. Suppose you bought a home for $380,000 in Fort Collins back in 2014 with a down payment of $20,000. So your loan amount was $360,000. 360,000/380,000 is about 95% — not yet below the magic 78% threshold. If your loan was taken out at a 5% rate, your loan balance is now about $326,000. That loan results in a loan-to-value (LTV) of about 86% (326,000/380,000). Still not down to 78%… Fear not, your home has appreciated during this 5-year period. The average annual appreciation rate from 2014-2018 in Fort Collins was 9.54%. So appreciation increased your home’s value to almost $600,000. LTV is now 326,000/600,000 or about 54%. Bingo, you no longer need PMI! All you’ll need to do is get a current appraisal when you refinance.
Hopefully you can see that it’s worth evaluating a new loan for your home. A lower rate and the elimination of PMI payments can significantly reduce your monthly housing costs. There are quite a few important details in evaluating your personal situation and we’d be happy to help you think this through. Please visit our website or give us a call at 970.419.8212 so that we can discuss this important topic in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.