My house is protected by PMI!The more I think about it, the more I want to focus on paying down the mortgage.

When I paid off the last of my credit card debt, the house just happened to become the top priority. Not for any real reason other than the fact that I already had an automatic payment plan in place. With the extra money around, I just increased the size of my payments.

After around a month, though, I realized that it wasn’t exactly the wisest path to take. I switched things up and started paying down my auto loan instead. I also increased my savings rate.

But now, I’m starting to lean back towards the mortgage again…

Yes, all of this flip-flopping in just 2 months time. I should run for office.

I haven’t put anything into place just yet, but while going through my records, I noticed that my mortgage holder (CountryWide) does their escrow analysis on my account each year somewhere between October and November. For the past 4 years, anyway, it’s been one of those two months.

Now, my whole point of paying down the mortgage quickly is to eliminate the monthly PMI that I’m paying out of that escrow account.

Private Mortgage Insurance (PMI) – 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.

PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment.

Under HPA, you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less. You also need a good payment history, meaning that you have not been 30 days late with your mortgage payment within a year of your request, or 60 days late within two years. Your lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.

Eliminating the PMI from my mortgage bill would essentially ensure that an additional $85.15 would go towards principle each month. (Technically, my minimum mortgage payment would go down after the analysis, but I’d continue to send in the same amount on my own — resulting in the $85.15 per month increase.)

That sounds like a good thing, right?

Well, considering that my regular payment applies less than $300 towards principle each month, an additional $85.15 is like increasing my payment by over 25% — and that’s without sending them an additional dime. That makes it very attractive.

As of today, I have $1901 more to knock off the principle before I can safely request that they remove the PMI from the calculation.

To be safe, I think I should press to reach that goal by September, at the latest, to ensure that I get there before they kick off their analysis procedure.

(I’m aware that I can request that PMI be removed any time after I reach the 20% level, but the escrow analysis locks in my monthly payment for an entire year. If I don’t make it by the upcoming analysis, what was going towards the PMI will just sit in the escrow account and result in an escrow overage. In that case, they’ll send me a check of the difference in November of 2009 after the next analysis — not exactly ideal which is why I’m trying to avoid the scenario all together.)

So, with most of my income for June likely being sucked up by our upcoming vacation, I’m thinking that, to be safe, I’ll have to send around $2000 extra towards the principle spread accross July, August, and the first few weeks of September.

That’s a definite possibility if I scale back the current plan of $1000 towards the car and $1000 towards savings each month.

Actually, if I were feeling really daring, I’d just take the $2000 I have in savings right now and send it right to Countrywide and call it a day (or year?)… Nah, not feeling it…

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8 COMMENTS

  1. I can follow all of your decisions and the discussion of the PMI and all. I understand why you’re having trouble deciding. Personally, I’d probably focus on getting rid of the car loan, and then use whatever they sent me extra out of the escrow account towards a goal/debt payment at the time. (Roll it back into a mortgage payment or something.)

    Still, I do have one question. What is the escrow account for on a mortgage? Before the sale, I understand it’s something like ernest money, but what is it for after the sale?

  2. Hi Gaming Girl!
    Right now, the mortgage company pays my PMI premium each month, the city property tax twice annually, and my homeowners insurance premium once per year — all of it is drawn from the escrow account.

    So, for each mortgage payment I send in, they assign $438.05 each month to this escrow account to cover the expenses they pay on my behalf. It’s one of those “hidden” mortgage expenses.

    I remember when I was playing with online mortgage calculators before I bought my house thinking, “wow, houses aren’t very expensive.” Then the first mortgage bill came in with all of the “extra” costs outside of principle and interest. At the onset, it nearly doubled my monthly mortgage bill. It was a major reality check.

    For my focus, I am going to push the auto loan aside because it doesn’t have a deadline looming like the escrow account. If I don’t make it by October, I’ll be locked into another year of overpaying by $1020.80 ($85.15 x 12 months), and that will suck…

  3. Couple things. eliminating PMI is probably a pretty interesting route. Conventional wisdom says pay off the auto loan first, but I doubt you will save 1000 in a year by paying that first. I like it. Although I would take that extra 85 and put it towards the auto loan and then savings/emergency funds before paying extra on the mortgage. I would rather get out of debt and have more flexibility than lock the money up until you sell the house.

    Second, you will probably be able to request that they remove escrow and return the funds to you. You can then assume control of all of those funds and pay taxes yourself. Plus you can gave some extra interest on that money while you manage it.

    Third, belated congrats on the credit card payoff! Keep digging!

  4. Is it feasible to pay extra to Escrow in order to get your monthly payment to drop, mainly the Escrow portion? It looks to me like by paying extra to Escrow, you can reduce your monthly payment?

  5. Hi Danny!
    Unfortunately, it doesn’t work like that…

    Your idea should technically (depending on how much extra you send in) prevent your monthly payment from rising but at the end of the year, the mortgage company will issue a check for any “escrow overage” and you’ll be right back where you started — except you’ll have most of your money back.

    The best way I’ve found to lower your monthly payment on a fixed mortgage is to pay for your home insurance yourself rather than through the escrow account.

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