Eliminate PMI Before Retirement Savings?

Ryan and his wife want to know if they should try to pay down their mortgage to eliminate PMI before moving on to Baby Step 4. Dave thinks they need to go ahead and start their retirement.

QUESTION: Ryan in Augusta and his wife want to know if they should try to pay down their mortgage to eliminate PMI before moving on to Baby Step 4. Dave thinks they need to go ahead and start their retirement.

ANSWER: PMI is not what you’re dealing with in an FHA loan. It’s called MIP (mortgage insurance premium). It’s a little different, and it’s structured a little different. I’m not aware of the five-year regulation, but I wouldn’t doubt that’s in place. If memory serves me right, you have to pay that thing way down before they even talk about it. I wouldn’t worry with that one right now. The only reason I would want to pay it down would be to be able to refinance it while these rates are down.

Let’s go ahead and do Baby Step 4. You’ve done a great job. You’ve gotten your debts paid off. You have your emergency fund in place. Go ahead and start your retirement plan at 15%, and any other money you scrape up, you can go ahead and start throwing that at the house. That’s Baby Step 6, which is where you’d be anyway. As the house comes up in value and you pay the balance down while funding your retirement at 15%, then I think at that point you’re going to see enough spread happen that you may want to refinance. That depends on what rates do while you’re doing all of that. The good news is you don’t have a very big mortgage in the scope of life. You didn’t call me owing $600,000. One hundred thousand dollars is doable. You’d be surprised if you just keep occasionally throwing some money at it, and anytime you get a little here or there, you just throw it at it and you keep doing your 15%. You may look up one day and be able to just knock that thing out.

I think that’s the plan. Let’s just go ahead and work the Baby Steps the way they’re designed. I think you’re going to be fine doing that. You are doing a great job. You’ve got a mortgage at less than 5%. You’ve got a modest home that you can afford. You’re making $60,000 a year—over the average household income. You have no debt. You’re starting retirement, and you’re 24 years old. Dude, you’re doing so good.