Private Mortgage Insurance - PMI
Categories: Mortgage
There’s your car insurance, your health insurance...what’s that you say? You’re buying a house? With less than 20% of the home’s value as a down payment? Welp. That means more insurance for you...private mortgage insurance. Except that PMI isn’t insurance for you. It’s insurance for your bank. The interest you pay on your mortgage is like interest you’d pay on any other loan, which is paying the lender for the service of getting money sooner rather than later via a loan.
But since mortgages are so big, they’re essentially big gambles for banks. If you pay a down payment of 20% or more on your house, the banks trust you more to pay it all back, because you’ve got money in the bank. But if you don’t...that is, if your down payment is less than 20% of the house or apartment you’re buying...then the banks will still let you have your mortgage, but only if you pay for private mortgage insurance to cover themselves for taking on the risk of...you.
For example, if someone pays $200k for a home and they put 20% down, they pay $40k up front to the bank. Then the bank creates a loan for the remaining $160k, which the borrower pays off over 15-30 years (if all else goes smoothly). Since they put 20% down, they can skip monthly PMI payments, which is kind of a big deal. PMI can cost between a half % and 1% of the loan every year.
For instance, if that same someone put 10% down instead of 20% on that same $200k home, that means they put down $20k and took out a mortgage of $180k. Since their down payment is less than 20% of the house’s price, they’ll be stuck paying PMI, which would cost them somewhere around $1,000 to $2,000 per year, plus taxes (yep, PMI payments aren’t tax-deductible, unlike mortgage interest). Kind of ironic, but having less money often costs more money. Because less money means more risk. Should something go awry and you can’t make payments anymore, the bank has to then sell the house to try to regain the money from your defaulted loan. It’s a bummer for you, but it’s a bummer for your bank, too. Truth be told, the bank would rather not sell your house, since that whole affair is a whole lot of trouble, and costs money. The commission and lawyer costs, eviction sheriff bumper cars...all those expenses add up.
This is where PMI comes in. Private mortgage insurance is insurance for your lenders in case you end up foreclosing on your house. The PMI money you’ve been paying your lender goes towards an insurance policy that helps your lender recuperate the money they lent to you, especially if the house sells for less than what you originally borrowed.
How do you avoid paying PMI...money that’s just going down the drain and into an insurance policy to help your lender in the case that your life gets lit on fire (in a bad way)? You put 20% down, that’s how. Okay, but say you can’t afford to put 20% down, or it’s too little, too late, and you already put 10 or 15% down. Well, the good news is that you can stop paying PMI...eventually. That is, you can stop paying PMI once you’ve paid off 20% of your home. As long as 20% of your house has yet to be paid for in cold, hard cash, your bank will consider you “in the danger zone,” requiring PMI payments. Once you have 20% equity in your house outright, whether through your initial down payment or not, you don’t have to pay PMI anymore.
Well, as long as you tell your lender. Legally, they have stop charging you PMI payments once you tap them on the shoulder and say “Hey guys, I have 20% equity in my house now, so can you like, not with the PMI charges anymore?” If you forget to tap them on the shoulder when you have 20% equity, don’t worry...they legally have to stop charging you for PMI once you get 22% equity in your house. If you put down 10% on that $200k house ($20k) and made monthly mortgage and PMI payments (with some extra mortgage payments thrown in) until you paid down another $20k, you now have $40k equity...or 20% equity...in your home. Time to call the bank and say sayonara to those PMI payments. But if you don’t, you’ll keep paying PMI payments along with your monthly mortgage payments...that is, until you have 22% equity, which is when you’ve paid $24k in monthly mortgage payments. If you want to save money, better to tell your lender to get rid of that PMI as soon as you reach 20% equity. If you put less than 20% down on your house, it’s a race to reach 20% equity so that you can stop making those pesky PMI payments.
Related or Semi-related Video
Finance: What is PMI insurance?0 Views
and finance Allah shmoop What is PM I insurance All
right people There's your car insurance your health insurance What's
that you say you're buying a house with less than
20% of the home's value is a down payment Well
guess what that means more insurance for you Yes private
mortgage insurance PM I accept the PM I isn't insurance
for you No it's insurance for your bank The interest
you pay on your mortgage is like interest you pay
on any other loan which is paying the lender for
the service of getting money sooner rather than later you
know via alone But since mortgages are so big while
they're essentially big gambles for banks if you pay a
down payment of 20% or more on your house well
the bank's trust that they'll get all their money back
because he already paid 20% of the value of the
house up front and the odds that the home goes
down more than 20% in value and all that stuff
in any kind of short term is pretty low right
So But if you don't put down 20% like you
know if your down payments 10% or 5% or something
like that Well then the banks will still let you
have your mortgage but only if you pay for private
mortgage insurance to cover the banks for taking on a
whole lot of risk on you Write so well go
through an example If someone pays 200 grand for a
home and they put 20% down well they've paid $40,000
up front to the bank Then the bank creates alone
for the remaining 160 grand which the borrower pays off
over a 15 or maybe 30 years If all else
goes smoothly since the buyer put 20% down they can
skip the monthly PM I payments which is kind of
a big deal right PM I can cost between 1/2
a percent or 1% of the loan every year maybe
more depending on you know how bad your credit is
For instance if that same someone put 10% down instead
of 20% on that same 200 grand home So that
means they put $20,000 down took out a mortgage of
180 grand well since their down payment is less than
20% of the house price They'll be stuck paying PM
I which will cost him somewhere around a grand or
two a year plus taxes and yes PM My payments
are not act deductible Unlike mortgage it's kind of ironic
but having less money often cost you more money Yes
welcome to the real world people because well less money
means more risk for the bank Well should something go
awry and you can't make payments anymore well the bank
has to then sell the house to try to regain
the money from your defaulted loan And yes it's a
bummer for you but well it's a bummer for your
bank to they hate this Truth be told the bank
would rather not sell your house since that whole affair
is a whole lot of trouble and cost them money
and grief and bad press The commission and lawyer costs
and eviction Sheriff bumper cars you know families being evicted
all those expenses Yeah they add up This is where
pm I comes in Private mortgage insurance is insurance for
your lenders In case you end up getting your house
foreclosed upon the PM I money You've been paying for
Your lender goes towards an insurance policy that helps your
lender recuperate the money they lend you especially if the
house sells for less than what you originally borrowed Like
you paid 200004th But you overpaid It really should've sold
for 1 85 and then the market went down And
then he had to pay a 6% commission to the
Realtor And he's only paid two grand of your mortgage
down And somehow after all the expenses the bank only
got 146 grand in there $10,000 in the hole And
that's a big problem right So how do you avoid
paying PM I You know money that's just going down
the tubes down the drain and into an insurance policy
to help your bank your lender a sleep better at
night Well you put 20% down That's how but we'll
say you can't afford to put 20% down or it's
too little too late You already put 10 or 15%
down on you in that home You're stuck paying PM
My number's right Well the good news is you can
stop paying PM I eventually That is you Khun Stopping
PM I once you've paid off 20% of your home
or the value of your home is gone up enough
such that the bank believes that you actually have 20%
equity in the home as long as 20% of your
house has yet to be paid for in cold hard
cash while your bank will consider you in the danger
zone requiring PM I payments once you have 20% equity
in your house out right Well whether your initial down
payment or not while you don't have to pay PM
eye anymore you know so long as you tell your
lender right legally they have to stop charging UPM my
payments Once you tap them on the shoulder and officially
say Hey guys I have 20% equity in my house
now So can you like not do it with the
PM I charges anymore If you forget step them on
the shoulder When you have that 20% inequity Well don't
worry They legally have to stop charging you for PM
I Once you get to 22% equity in your home
if you put 10% down on that $200,000 house or
20 grand and made monthly mortgage NPM my payments with
some extra mortgage payments thrown in until you paid down
another 20 grand Well now notionally At least you have
$40,000 in equity or 20% equity in your home Time
to call the bank and say science art of those
PM I payments But if you don't if you don't
tell him if you don't give him a legal notice
well then you'll keep paying PM I along with your
monthly mortgage payments you know kind of forever ish That
is until you have 22% equity in the home which
is when you've paid 24 grand incrementally in mortgage payments
down right If you want to save money well better
to tell your lender to get rid of that PM
I soon as you can If you put less than
20% down in your house it's a race to reach
that 20% equity so that you can stop making these
pesky PM I payments And besides just paying mohr than
you have to on your mortgage while for instance making
a full extra mortgage payment every year which can save
you a surprising amount of the mortgage interest in the
long run Just saying there are some other options too
If the housing market is hot in the value of
your house has gone up well you can get your
house reappraised to show they have 20% equity in your
home just based on the down payment they already made
and head back to your lender with that good news
right So in this case if a homeowner put 20
grand down and took a loan for 180 grand on
a $200,000 home purchase price and in five years they
paid down the 180,000 they owed to being well just
170 now and in that time period the home's value
one from 200 grand to a new Zillow estimated market
value of 250 grand then the easy math would let
the home longer subtract $170,000 in mortgage from the $250,000
Zillow price showing equity they had in their home of
$80,000 Well 80 over 250 Yeah that's 32% of the
homes new value well over the 20% needed for PM
My insurance If the market's doing that well it's probably
in the homeowners best interest to refinance at at that
point in anyway because you probably get cheaper interest rates
Another thing homeowners can do Besides you know praying to
the housing gods for a favorable market is to take
their home into their own hands Literally renovated bathrooms and
kitchens are too big ese that add significant value to
a house especially if they were you know outdated When
he about the house Ah homeowner can get toe work
sprucing up their home then get it re appraise for
a higher amount which will have the same effect as
if the housing market gods were favorable at the time
And the risk here of course is that if you
live in a state where it's taxes are based on
the appraised value of your home when you re appraise
it at a higher value you risk the tax man
coming by and raising your taxes So yeah have you
got in for people Homeowners can do all three of
these things make extra mortgage payments created the housing market
gods for favorable market and replace that godawful sink in
the kitchen that has a questionable permanent stain The sooner
you get 20% equity while the sooner homeowners will free 00:06:58.868 --> [endTime] themselves of the shackles of PM I payments gloriously