I recently refinanced my home mortgage. Yes, I’m very jealous of my fellow financial bloggers out there, many of whom are debt free and have paid off their own mortgages completely.
Unfortunately, this is not the case for me as I’m still a ways away from this goal. So in the meantime, I pay a mortgage in order to live in my house. (or should I say the bank’s house).
Although, even though I have a mortgage, refinancing turned into a great situation for my monthly budget. I essentially lowered my rate by almost a full point and saved myself a nice chunk of change on my monthly payment. I plan to use the extra money to pay off even more debt and give myself some breathing room in my budget.
While going through the refinance process, I came across the ‘little devil’ of taking a mortgage loan. The ‘little devil’ I’m referring to is PMI insurance. I’ve always found PMI insurance to be a bit of a scam for the borrower, although I’m sure those in the banking world would disagree with me.
But before I get into why I think this way, lets get into what PMI insurance is exactly…
What is PMI Insurance?
PMI stands for private mortgage insurance. Essentially PMI, as it is commonly referred to, is insurance for the lender of your mortgage in the event you default on your loan. The best way to look at PMI mortgage insurance is a safety net for the bank underwriting your loan.
The interesting thing I find with PMI insurance is that you pay it as apart of your mortgage (if required), and if you default on the loan the lender collects your home as collateral. If the lender gets in trouble and can’t sell your home to pay off the existing debt. The mortgage insurance money goes to the lender to cover your default. The lender still gets to repossess your house, so they not only get your asset, but they also receive the mortgage insurance payout and usually lose nothing.
But what if the lender sells your house for more than you owe on it, does the mortgage insurance company or the lender pay you back that equity? Of course not!
This whole process confirms the Biblical Proverb “The borrower is a slave to the lender” and is why I think PMI is somewhat of a scam that provides no benefit to the payer. That being said, it does allow for individuals to purchase homes without a 20% down payment.
How to Avoid PMI Insurance
Below are the 3 ways to avoid PMI insurance. I haven’t found any more than the following, unless you received your loan from a family member or friend (and not the bank).
1. Have a 20% down payment
The first and main way people avoid PMI insurance is to have 20% of the principal balance of the loan available in cash at closing on the mortgage.
In other words, when purchasing your home, after the home is appraised and a value is found for its market value, your loan balance cannot exceed 80% of this value. If it doesn’t, you will not need to acquire PMI insurance.
2. Acquire a Loan from a Bank that will pay the PMI insurance for You
There are mortgage lenders out there that will “self-pay” your PMI mortgage insurance for you. This will always require a loan interest rate higher than the average, usually by 0.5% to 1% more. (yes, you pay more interest!)
This can be beneficial in that you will usually receive a lower monthly payment on a loan of this type. The downside is that you will not receive a lower payment when you own over 80% of the home value, which is when PMI typically ends. Essentially, the lender will receive this additional money if you are still in a mortgage situation, because you will still be making payments.
There is generally one main requirement for this type of loan. You must have 10% equity in your house if refinancing or a 10% down payment. Mortgage lenders will currently not enter into this type of relationship for less than 90% loan to value.
3. Acquire a 80-10-10 Mortgage
The third option to avoid PMI mortgage insurance is to use a 80-10-10 mortgage. 80-10-10 means that 80% of your total purchase amount is a standard mortgage, 10% is a secondary mortgage usually at a higher interest rate and typically a balloon payment, and the final 10% is your down payment.
This type of mortgage removes your PMI, because your 20% down payment on the primary loan is covered by a secondary loan of 10%, and your 10% down payment. Currently the industry doesn’t allow for a 80-15-5 loan, which used to be common place before the mortgage crises. (I actually had one, many years ago.)
When on earth can I get rid of PMI on my current mortgage?
The Loan Owners Protection Act of 1998 requires lenders to remove your PMI from your mortgage payment when you have paid down the balance of your loan to 78% of the total market value.
What this means is that you only need 20% when purchasing a home to avoid PMI, but when you’re already within a mortgage, you must have 22% ownership. This however is not true if you have an FHA loan with mortgage insurance. An FHA loan requires you to pay mortgage insurance for the life of the loan.
Its recommended that you notify your lender when you believe this has occurred. It may be that your home value has increased, and you now own over 22% equity of the house.
What will you pay in PMI on your mortgage?
Want to get an estimate on your PMI mortgage payment? Use this chart from “Daily Interest” to get a quick calculation. As you can see it depends on you LTV (loan to value of your home), and the length of mortgage term.
| LTV | ||
| PMI Rate | PMI Rate | |
| for 30 year mortgage | 10, 15, 20 year mortgage | |
| 80.01% – 85% | 0.32 | 0.19 |
| 85.01 – 90% | 0.52 | 0.23 |
| 90.01% – 95% | 0.78 | 0.26 |
| 95.01% – 97% | 0.90 | 0.79 |
Example: You are purchasing a home for $150,000 and have 10% down or $15,000. You plan to take a 30 year fixed mortgage. Your PMI rate will be $1350 per year or $112.50 per month. ($150,000 x .0090 = $1350 per year) until your own 78% of the property.
Final Thoughts?
Now that you know about PMI mortgage insurance, what will you do? Will you save 20% and avoid it altogether? This is my recommendation if you can at all do so, as it will save you thousands upon thousands of dollars.
Do you have PMI on your mortgage? How do you plan to remove it?