When I was a kid, one of the things that I remember about home ownership is that people would have to save up for a long period of time in order to be able to put down at least 20% of the purchase price of the home as a down payment. However, over the past 10-15 years, the practice of planning a home purchase based on when you could save up a 20% down payment has essentially become obsolete.
What Is Private Mortgage Insurance (PMI)?
Because of this failure to come up with the standard down payment, more and more people began paying private mortgage insurance premiums during the real estate boom of the mid 2000s. Private mortgage insurance (or PMI) is insurance that is in place to ensure that mortgage lenders do not lose money in the case where a mortgagor is not able to repay the loan, and the full costs cannot be recovered even after a foreclosure and sale of the property.
Because of this, private mortgage insurance is usually required when the borrower is putting up less than 20% of the purchase price or appraised value of the home. The cost of your insurance will vary depending on the size of the down payment and the loan and the location of the property (like one of these retirement havens), but they typically amount to about one-half of 1 percent of the loan – which would be about $2000 a year on a $400,000 house.
PMI definitely makes sense from the lender’s perspective, since they are taking on more risk by extending a loan that is at or close to the value of the property. In some cases you will actually pay an upfront premium in addition to the ones baked into your mortgage payments.
PMI is an extra fee that can add a substantial amount to your monthly mortgage payment (especially when you consider interest, homeowner’s insurance, and taxes), and you may be required to pay this amount until the equity you have in your home reaches the twenty percent threshold.
How To Stop Paying Private Mortgage Insurance:
If you currently owe less than 80% of the value of your home and are still paying PMI, contact your mortgage company immediately for instant savings (it issupposed to be canceled automatically once you owe less than 78%). They will require proof that your equity position is stable and is more than 20%.
That “proof” will come in the form of an independent appraisal. Unfortunately, you are usually not given a choice regarding the appraiser or the total amount of the fee; but at least you get to pay for it (sometimes at a cost of $500 or more)!
If you still owe more than 80% of the value of your home, but you have enough money in savings (“enough” is relative), it may make sense to pay down your mortgage in order to stop paying these fees.
My Thoughts About PMI
To me, it doesn’t make sense to pay insurance premiums for a plan that doesn’t even cover me . I wonder how many people actually add PMI to the equation when figuring out if it’s time to buy a home. What was that? Most people don’t make any calculations when trying to buy a home? Well, then I guess they won’t mind paying an extra couple of hundred dollars (with the home prices in my state) per month in order to grab a piece of the “American dream”. Maybe you can buy a home overseas instead! 😉
Seriously, how many other types of insurance can you think of where the one paying the premium doesn’t benefit at all from the protection offered by the coverage? And to me, if a loved one benefits, then I benefit, so you can’t add any types of life insurance to that list.
If you have crunched the numbers and you can tell me that it is better for you financially to rush into buying a home with little to no down payment and paying PMI, then maybe there may be some merit to this; but as far as I can see it (in most cases that I have observed), it is a huge waste of money, and it is another cost of being financially unprepared and undisciplined!
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PMI is certainly not a great thing to have on your mortgage, however do keep in mind that a family buying a home is likely to be paying similarly to their new payment in rent. Paying rent provides you with no interest or property tax deduction. I personally just moved to Dallas and bought a home for about 200k. My payment with PMI, taxes, homeowners insurance, and the principal and interest is still 400 less than I would be paying to rent this place. In addition to that savings, I pay taxes of 4000 a year and interest of about 5000 per year. My income is going to push me well into the top tax bracket this year so my deductions will save me about one-third of the amount I’m paying. With that being said, and not taking into consideration the fact that it is still a lower payment than renting the equivalent home, I’m paying 1200 to save 3000. If I had waited another year or two to save more up, I would have been doing myself a financial disservice
I guess it depends on where you live. In my area, rental prices are not even close to the full cost of a mortgage, so it definitely wouldn’t make sense here. But in your case, it seems like the comparison of those two costs made the purchase a good decision – especially with your income being in the highest tax bracket.
Thanks for leaving a comment and explaining a case in where a purchase with a smaller down payment was a good thing!
Wow I never thought about PMI like that, but it’s true, it doesn’t even cover you haha. I don’t think you should ever pay PMI period. If you can’t save up 20% of a home’s value, you probably shouldn’t be buying that home. Plus it gives you some leeway if the value of your home goes up or down.
I agree completely! But people have a way of telling themselves that the future will always be better…so they borrow against their future and live in bondage and regret!
My friends made the calculation when they bought a short sale or some other bank-owned property — they figure, even with PMI, they are paying much less than they were when they were renting, so they don’t mind it. Me? Nope. I’m not going to buy a house until I have 20% of something good, not just 20% of a shitty one-bedroom apartment.
I have less of a problem with it if someone does the proper research and calculations beforehand…but I still don’t like the idea of PMI. I like the fact that you are willing to wait until you are ready financially!
This is why I saved up 20% for my house. I didn’t want to pay PMI.
How long did it take you to save up that much? I know people are usually so impatient that they will buy a house without having any money saved.
From September 2008 – March 2012.
3 1/2 years to save up 20% is pretty good.
I’m absolutely planning on putting 20% down when I buy a house. It’s ridiculous for me to pay for insurance that covers the bank!
I can’t imagine buying a home at all, but if I do, I would have to have a large down payment.
There’s a loan program here in Minnesota that allows you to pay less than 20% and still NOT have to pay PMI. We went with this loan, owe more than 80% of the houses value, and are not paying a dime of PMI.
That’s great. I didn’t know that programs like that existed. I wonder how common that is…
The program did not exist in Minnesota until May of 2012, and I have no idea how many states have something similar. Most people in Minnesota do not know about it unless their loan officers points it out to them.
PMI is an absolute scam. It’s so painful I couldn’t even imagine buying a home that was subject to PMI.
Either go conventional loan with 5% down that buys your PMI out — rehab it and then refinance after the first year (as I did, went from 5.5% to 4%), or put 20% down.
Yeah, I hate seeing that people are so desperate to own a home that they will pay whatever fees/premiums are necessary…even if they don’t make financial sense.