How to save money and lower mortgage insurance

By Ilyce Glink & Samuel Tamkin

Q: I'm 28-years-old. My wife and I have owned our home for 2.5 years now. When we purchased it, I did not put down 20 percent, so I'm paying roughly $165 per month for mortgage insurance (PMI). If it helps, we do not plan on living in this house forever, but likely for the next five to 10 years. I have a low interest rate on our mortgage of 4.25 percent on a standard 30-year fixed FHA loan. I have a payment schedule set up with Wells Fargo for weekly mortgage payments, with an extra $30 per week to be applied to the principal.

In essence, I've been trying to build enough equity to get rid of PMI so that I can put that $165/month into retirement savings, instead of wasting it on PMI. However, neither myself nor my wife have any retirement savings (shame on us, I know). All we have is an "emergency" bank account with about 9 months' worth of expenses saved, should we ever need to use it. My question is, am I doing the right thing? Should I be taking that $30/week ($120.00 month) and putting that into a Roth IRA instead of the principal on our home?


A: We appreciate that you are making an effort to eliminate mortgage insurance from your loan and trying to save money. You'll have to see how close you are to eliminating mortgage insurance from your loan. It usually takes quite some time before you can get rid of it. Depending on how much you put down, you have to get to 78 percent of what you paid for the home to get rid of it. If you only put down 3 percent or so, you may have years to go before you make a major dent.

However, if your property has gone up significantly in value over the last few years, you might consider refinancing your loan. When you refinance, the lender will consider the new value of the home in determining whether you must have mortgage insurance or not. If values have gone up, refinancing is the easiest way to eliminate mortgage insurance.

Talk to a mortgage lender or mortgage broker to see how you might benefit from refinancing. You might obtain a new mortgage at around the interest rate you currently have without the mortgage insurance expense. However, you might need to work with a lender that will limit any refinance closing costs. Depending on where you live, refinance closing costs might be too high to justify refinancing only to get rid of the mortgage insurance.

There are many ways people can save for retirement, and saving anything from today's spending so that you can have more later in life is a noble objective. We would assume that mortgage insurance at about $165 per month is only one of many expenses you incur that are in that monthly range. You might have cable bills, eating out expenses, and other items that you could either scale back or reconsider. If you find some other expenses you can cut out of your monthly budget, you then can not only find lower monthly mortgage expenses, but can also put away money for your retirement.

So if you can't get rid of the mortgage insurance and you won't get rid of it while you live in the home, you might be better off using that money plus any more you find to fund your retirement accounts.

The earlier you start to save for retirement, the greater that money can grow for you. Starting at your age, you can set up a plan to save weekly for retirement and doing that will put you way ahead of others of your age group that may not have done much to save for retirement and find themselves years from now with kids, college expenses and nothing left for retirement.

Source Chicago Tribune