Why Paying Off PMI Is A Great Return On Your Investment

by Hank Coleman

paying off PMI is a great investmentWith the stock market treading water lately, there are only a few options where you can earn a decent and guaranteed rate of return on an investment. You may actually think that any type of guaranteed rate of return is impossible in today’s market, but I have found one place where I can earn a great rate of return on my money…my mortgage. Paying off PMI can be a great return on your investment.

Typically, you think about the interest you save when you pay off a debt. If you have a credit card balance on a card that charges you 16% annual interest, for example, paying that balance off is exactly like earning a 16% rate of return on an investment.

Instead of paying your credit card company that percent in interest, your cash flow increases instead as a result of paying down that debt, and you can use that money for other ventures such as investments or building your emergency fund.

One place that many of us do not consider very often is the private mortgage insurance that we pay on our home loans. If you do not put at least a 20% down payment on a conventional home mortgage, your lender will almost always require you to purchase private mortgage insurance, more commonly known simply as PMI.

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While the cost of PMI is not very expensive when compared to your total mortgage, taxes, and insurance payments on your home, these additional payments that are tacked onto your mortgage in escrow can begin to add up over time. It can be beneficial to pay off PMI. For example, a $200,000 home in which you paid 10% down and secured a mortgage of $180,000 for the balance would typically require approximately $100 per month to be paid for private mortgage insurance.

This is again on top of your principle and interest payments. Not only will it cost you $1,200 per year in PMI payments that do not reduce your principle, but you will be paying those fees for the next six years until you get your equity to the magic 20% level where PMI can then be waived. PMI over those six years will ultimately cost you $7,200 over that time, and it can be a great thing to pay off PMI.

But, what if you could pay more on your mortgage principle in order to reach that 20% level of equity faster? Would that be a good return on your investment? It turns out that it would. It would be a good use of your funds when compared without investment opportunities and their rates of return. If you had $20,000 available to invest in paying down your home mortgage, you could eliminate your need for PMI.

You may think that $20,000 is a lot of money to pay in order to save only $100 per month. In fact, an investment in your mortgage to speed up paying off PMI would equal a 6% annual rate of return on that investment. And, that does not even include how much interest you would save by paying off a portion of your mortgage early.

With that one time investment in your mortgage of $20,000, you could ultimately pay a 30 year-fixed rate mortgage off in as little as 22 years instead of thirty. That alone could also save you tens of thousands of dollars in mortgage interest payments.

I know what a lot of you are probably thinking. There is no way that you have $20,000 just lying around to invest in paying down your mortgage. But, maybe you have a few thousand dollars that you can use to pay down your mortgage right now. Maybe you can sell a car that you really do not need. Maybe, instead of it taking you six years to reach that 20% equity level, it only takes you three years if you really attack your mortgage payments.

Are you paying more than your minimum monthly payments on your mortgage? By even adding a little bit towards each monthly payment, you can end up shaving years off the total amount you pay for your mortgage. To continue using the example from above, you can pay a 30 year mortgage off in as little as 25 years if you add $100 to each of your monthly mortgage payments.

While the economy seems to have hit a skid and the stock market is spinning its wheels, there are other alternatives to investing that you can pursue that will earn you a decent rate of return on your money. There are unique ways to earn a competitive interest rate if investing is not providing you with a large enough rate of return.

What about you? Are you paying off your mortgage early?

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.

Hank Coleman has written 593 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.

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