Advice/Thoughts needed: eliminating PMI with payment from HELOC

[Andrew K.]

Greetings! Scenario: Bank A holds my mortgage with a 2.875% interest rate. My mortgage has private mortgage insurance (PMI) on it with a monthly charge of $91. My current LTV is approx. 45%. Bank B holds my HELOC with a adjustable interest rate, currently set at 4%. Currently zero balance. Upon any draw from the HELOC, required monthly payments are 1% of the remaining balance (i.e. $10k balance would require a $100 payment for Month 1, then $99 payment Month 2, etc..). So, I called Bank A to inquire about eliminating my PMI. They told me that my loan balance would have to be down to a certain point, then PMI will drop off automatically. To get to that certain point, I can either wait till it naturally occurs by making my normal monthly mortgage payments, or I could accelerate it to that point by making an additional principle payment of about $8900 now. So I thought about it: what if I draw $8900 from my HELOC to use to pay down my mortgage balance. That would eliminate my PMI (saving 91 monthly), and I would be paying $89 a month ($30 of which would be interest charge). So, I'd be paying down my HELOC principle balance every month (as required). The way I see it, is that I'd be effectively replacing a $91 interest charge with a $30 interest charge. And at the same time, I'd be paying down the principle on both loans, thus reducing the interest charges on those as well. I have a habit of getting "analysis paralysis" and I think I'm at that point now. Does anyone have any thoughts/advice about this? Am I thinking about it right? Sorry for the long post, just wanted to be thorough. Many thanks! Andrew

[Albert Bui]

FHA loans in the past had a rule where you had to pay down your loan to 78% of what you bought it for ( not your loan amount relative to today's market value) or 5 years min monthly PMI whichever is longer.

What probably has happened is the market in FL has taken off considerably so while you have 45% LTV based on your current market valuation your LTV based on your value in FHA's system probably hasn't reached 78% of the price you originally paid for the property otherwise your PMI would have ceased already (This assumes you still have the original loan from 2010 and you have not refinanced into a new FHA loan).

Keep in mind if you've refinanced your original FHA purchase loan from when you bought it with another FHA loan (FHA refinance AKA FHA streamline refi) then you will not be grand fathered into your old FHA guidelines because the current guidelines require:

- min 11 years or 78% LTV based on purchase price only if you put down 10% or more (which .001% of people who use FHA usually do)

- otherwise FHA PMI is now for the life of the loan, until paid off completely, or refinance, or property is sold

Since its been longer than 5 years (you bought in 2010) you should be able to pay it down to 78% of the purchase price to remove FHA's PMI automatically (or call them to inform them you paid it down to 78%).

The scenario on whether if its worth it to pay down your first loan with the HELOC isnt a simple one if you want to get technical because:

- PMI and whether its a write off is based on your tax bracket and if you make more than 110k in AGI or adjusted gross income you may not be able to write it off so this affects the decision as well

- the rate on your first loan

- the rate on your second loan

- usually fee's on HELOC's are $0 because banks want your business, but there are HELOC's out there that cost a couple grand to open so be mindful of this

If the net at the end of the day is positive it could be worth it or it may not be as well.

Hope that helped.