New House

When we bought our house two years ago, the rates were low, house prices in the DC area were rising and we had a growing family.

Housing in DC is notoriously expensive. While house-hunting, we searched for a long time, through many a terrible neighborhood to find the perfect single family home in the low $400s. This is far more than I ever expected to pay for housing. Yet, it’s amazing how quickly your relative sense of how much something should cost is warped after you move to the DC area.

I’m very aware that most minimalists would urge me to downsize, but we absolutely LOVE our house, neighbors, and school system. Plus, in 2.5 years, the prices have risen so much that if we wanted to downsize, we’d have to move farther away and probably pay more. We’ll be staying put.

Two years ago, we took a calculated risk. We decided to put less than 20% down to secure a place to live in a growing market with low interest rates. I believe this strategy will pay off, but we’re more than ready to get rid of the Private Mortgage Insurance (PMI) on our home.

PMI is the extra money you pay to cover the risk that you default on your home loan if you don’t put down 20%. It doesn’t benefit you in any way and you’ll never see a return on investment. The only thing it allows you to do is buy a house with less up-front money.

In general, you can remove private mortgage insurance from your home loan once you owe less than 80% of the lower value between your house’s purchase price and what it appraises at now. This means that we would have to pay another $45K against the original purchase price before we’re able to remove the PMI, even though our house is worth far more than the original price today. Without paying extra principle each month, that would take us another five years and over $16,000 in PMI alone.

Our other option is to refinance the loan. A new appraisal is done and if the house comes in at a high enough value, the new loan won’t carry PMI. Up-front costs are around $2000 and the rates are about the same (actually slightly lower) as our original home loan. The risk is that the appraisal won’t quite be high enough and we still have to carry PMI. Even if that happens, the time horizon we’ll have to pay PMI with a new loan is much shorter.

I’m not quite sure whether to refinance now while the rates are low and risk continual PMI, or wait until our house is definitely worth enough to remove the PMI and risk a higher interest rate.

What would you do? Would you refinance now, even if it meant possibly paying PMI for a little while longer, or would you wait to refinance (not knowing what the future rates will be) until you can remove the PMI completely?