Problems with PMI

My wife and I made a decision to to purchase a house during the summer of 2006 (Great timing with the market, let me tell you).  While we both had solid credit scores, the amount of money that we were making was not jaw dropping.  I had worked in web editing and web programmning independently over the past three years at the time and had earned a max of somewhere around $40,000 (That number includes deductions taken out for the business).  My wife was also going back to school and would not be bringing in any money.

The good news is that I had spent the past few years living at home and saving money for our down payment.  Since I knew I wanted to buy a house as soon as we possibly could, I did whatever I could to save as much money as possible.  And while I ended up with around $20,000 to put towards a house, the amount of the loan that they ended up giving us shows why the country is in a mortgage mess as we speak.

Again, despite being a one income family, they approved us to get a loan of up to $170,000.  With the down payment, we were able to go up to $190,000 and did end up near that final number.  In a house search, you want to avoid climbing towards that max amount.  But when we saw some of the houses in the $150,000 range, it was tough to see ourselves living in a house that made my wife throw up in her mouth because it smelled so strongly of cat urine.

Because we were unable to put down 20% of our eventual 186,500 purchase price, we have been stuck paying PMI since.  For those of you who are unfamiliar with what PMI is, here is a definition as provided by the Federal Reserve Bank of San Francisco: PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home’s value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI.

I have contacted our bank to speak with them about how to rid ourselves of the dreaded PMI.  What is funny is that unless you put 20% up front, that fee grows over time.  I believe that we would need to have owe less than $150,000 on our mortgage so that has increased to somewhere around 22%.  And in order to get rid of it, it will cost even more money.

The two options to kill this PMI are to get to that certain amount of money left in your mortgage.  Once that is completed, we have to fill out a form and send a $150 check to the bank for them to look into it and eventually get rid of it.  I have been told by someone that works at the bank that you can avoid that fee by applying for a home equity loan, but honestly, the last thing I would want at this time is a home equity line of credit.

The second option is to wait five years from when you first purchased the home.  When you do that, eventually they have sucked enough money out of you monthly to get rid of the PMI.  With our loan being somewhat low in the entire scheme of things, we pay around $70 per month PMI.  Over the life of five years, that would equal out to an extra $4,200 the bank makes in time because they gave us the loan.  Is it not enough to have a 6.5% interest rate and then stick us with $4,200 extra dollars?

I do understand why PMI exists.  It is an insurance for those who end up not being able to make their monthly payments.  And considering that we were a risky loan at the time, I can understand why we have to pay it.  But the question is, would it be worth paying $10,000 on our loan to get rid of it?

If there was no doubt that we would be staying in the house over time, my gut would be to pay it off as soon as possible.  The problem is that it seems like we will be moving within the next year or two.  Because realtors will be aware of how much you owe on your house, it may not be a great time to pay it completely down.  Yes, it would help reduce our monthly expenses by $70.  While that is not great, it is a start as we try to reduce our debt (Student loans as well).

For those that are also stuck paying PMI, is it better to wait it out the five years?  Or should you try harder to make extra payments?  That is why PMI is such a problem with us right now.