Finance: What is PMI insurance?

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Transcript

00:19

mortgage insurance PM I accept the PM I isn't insurance

00:23

for you No it's insurance for your bank The interest

00:27

you pay on your mortgage is like interest you pay

00:29

on any other loan which is paying the lender for

00:31

the service of getting money sooner rather than later you

00:34

know via alone But since mortgages are so big while

00:38

they're essentially big gambles for banks if you pay a

00:40

down payment of 20% or more on your house well

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the bank's trust that they'll get all their money back

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because he already paid 20% of the value of the

00:48

house up front and the odds that the home goes

00:51

down more than 20% in value and all that stuff

00:53

in any kind of short term is pretty low right

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So But if you don't put down 20% like you

00:58

know if your down payments 10% or 5% or something

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like that Well then the banks will still let you

01:04

have your mortgage but only if you pay for private

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mortgage insurance to cover the banks for taking on a

01:10

whole lot of risk on you Write so well go

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through an example If someone pays 200 grand for a

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home and they put 20% down well they've paid $40,000

01:18

up front to the bank Then the bank creates alone

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for the remaining 160 grand which the borrower pays off

01:23

over a 15 or maybe 30 years If all else

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goes smoothly since the buyer put 20% down they can

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skip the monthly PM I payments which is kind of

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a big deal right PM I can cost between 1/2

01:33

a percent or 1% of the loan every year maybe

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more depending on you know how bad your credit is

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For instance if that same someone put 10% down instead

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of 20% on that same 200 grand home So that

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means they put $20,000 down took out a mortgage of

01:46

180 grand well since their down payment is less than

01:50

20% of the house price They'll be stuck paying PM

01:52

I which will cost him somewhere around a grand or

01:54

two a year plus taxes and yes PM My payments

01:57

are not act deductible Unlike mortgage it's kind of ironic

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but having less money often cost you more money Yes

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welcome to the real world people because well less money

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means more risk for the bank Well should something go

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awry and you can't make payments anymore well the bank

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has to then sell the house to try to regain

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the money from your defaulted loan And yes it's a

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bummer for you but well it's a bummer for your

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bank to they hate this Truth be told the bank

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would rather not sell your house since that whole affair

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is a whole lot of trouble and cost them money

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and grief and bad press The commission and lawyer costs

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and eviction Sheriff bumper cars you know families being evicted

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all those expenses Yeah they add up This is where

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pm I comes in Private mortgage insurance is insurance for

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your lenders In case you end up getting your house

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foreclosed upon the PM I money You've been paying for

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Your lender goes towards an insurance policy that helps your

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lender recuperate the money they lend you especially if the

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house sells for less than what you originally borrowed Like

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you paid 200004th But you overpaid It really should've sold

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for 1 85 and then the market went down And

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then he had to pay a 6% commission to the

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Realtor And he's only paid two grand of your mortgage

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down And somehow after all the expenses the bank only

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got 146 grand in there $10,000 in the hole And

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that's a big problem right So how do you avoid

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paying PM I You know money that's just going down

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the tubes down the drain and into an insurance policy

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to help your bank your lender a sleep better at

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night Well you put 20% down That's how but we'll

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say you can't afford to put 20% down or it's

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too little too late You already put 10 or 15%

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down on you in that home You're stuck paying PM

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My number's right Well the good news is you can

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stop paying PM I eventually That is you Khun Stopping

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PM I once you've paid off 20% of your home

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or the value of your home is gone up enough

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such that the bank believes that you actually have 20%

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equity in the home as long as 20% of your

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house has yet to be paid for in cold hard

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cash while your bank will consider you in the danger

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zone requiring PM I payments once you have 20% equity

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in your house out right Well whether your initial down

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payment or not while you don't have to pay PM

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eye anymore you know so long as you tell your

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lender right legally they have to stop charging UPM my

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payments Once you tap them on the shoulder and officially

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say Hey guys I have 20% equity in my house

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now So can you like not do it with the

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PM I charges anymore If you forget step them on

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the shoulder When you have that 20% inequity Well don't

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worry They legally have to stop charging you for PM

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I Once you get to 22% equity in your home

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if you put 10% down on that $200,000 house or

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20 grand and made monthly mortgage NPM my payments with

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some extra mortgage payments thrown in until you paid down

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another 20 grand Well now notionally At least you have

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$40,000 in equity or 20% equity in your home Time

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to call the bank and say science art of those

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PM I payments But if you don't if you don't

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tell him if you don't give him a legal notice

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well then you'll keep paying PM I along with your

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monthly mortgage payments you know kind of forever ish That

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is until you have 22% equity in the home which

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is when you've paid 24 grand incrementally in mortgage payments

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down right If you want to save money well better

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to tell your lender to get rid of that PM

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I soon as you can If you put less than

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20% down in your house it's a race to reach

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that 20% equity so that you can stop making these

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pesky PM I payments And besides just paying mohr than

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you have to on your mortgage while for instance making

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a full extra mortgage payment every year which can save

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you a surprising amount of the mortgage interest in the

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long run Just saying there are some other options too

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If the housing market is hot in the value of

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your house has gone up well you can get your

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house reappraised to show they have 20% equity in your

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home just based on the down payment they already made

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and head back to your lender with that good news

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right So in this case if a homeowner put 20

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grand down and took a loan for 180 grand on

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a $200,000 home purchase price and in five years they

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paid down the 180,000 they owed to being well just

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170 now and in that time period the home's value

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one from 200 grand to a new Zillow estimated market

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value of 250 grand then the easy math would let

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the home longer subtract $170,000 in mortgage from the $250,000

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Zillow price showing equity they had in their home of

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$80,000 Well 80 over 250 Yeah that's 32% of the

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homes new value well over the 20% needed for PM

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My insurance If the market's doing that well it's probably

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in the homeowners best interest to refinance at at that

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point in anyway because you probably get cheaper interest rates

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Another thing homeowners can do Besides you know praying to

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the housing gods for a favorable market is to take

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their home into their own hands Literally renovated bathrooms and

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kitchens are too big ese that add significant value to

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a house especially if they were you know outdated When

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he about the house Ah homeowner can get toe work

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sprucing up their home then get it re appraise for

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a higher amount which will have the same effect as

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if the housing market gods were favorable at the time

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And the risk here of course is that if you

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live in a state where it's taxes are based on

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the appraised value of your home when you re appraise

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it at a higher value you risk the tax man

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coming by and raising your taxes So yeah have you

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got in for people Homeowners can do all three of

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these things make extra mortgage payments created the housing market

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gods for favorable market and replace that godawful sink in

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the kitchen that has a questionable permanent stain The sooner

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you get 20% equity while the sooner homeowners will free 00:06:58.868 --> [endTime] themselves of the shackles of PM I payments gloriously