Why PMI?

Question

On conventional loans, private mortgage insurance (PMI) is required with less than a 20% down payment. But what is PMI and what is it playing for and who is getting the money? What insurance do I get for paying PMI fees monthly? I'm just baffled my the whole concept.

If I were to get a conventional loan with PMI, what are the requirements to get that removed in the future? Are there benefits for putting more down just to avoid PMI? My goal is to hold on to this house as long as possible.

Charlie Fitzgerald · Answer

Figure out the cost of lost opportunity for the funds you will lose earning power on to put 20% down to avoid PMI and PMI is the best thing you can have.  The vast majority of people refinance out of a loan with PMI or sell the home within 3-5 years.  So the whole "life of the loan argument" is a rudderless ship.  If your PMI on a 300,000 house is $200 a month and you have to pay it for 5 years before refinancing or selling, you've spent  $12,000 for PMI.  If you put 20% down to avoid PMI it will cost you $60,000 plus your lost interest opportunity on the $60,000.  Yes, your PITI payment will be less on a loan with a $60,000 down payment.  But at today's interest rates, your rate of return is much better in lots of other places.

Zack Karp · Answer

Julie Marquez nailed it.  Most of my saavy borrowers put as little down as possible, especially investors, because money is so cheap right now, and you can find a return with that money elsewhere greater than the cost of it.

Hope that helps, best of luck!

Daria B. · Answer

PMI is the lenders way of saying, "you didn't put down the required amount so I'm going charge you to help protect me the lender".

I was charged PMI on my very first home purchase. I was 29, new, and had a horrible agent. I didn't realize that the carrot dangling in front of me meant I was going to pay PMI. I did an FHA loan less than 20% to help keep money on my pocket. And back then the PMI was added based on those particulars.

I can't remember when it was removed but it was and not by me requesting it - I think after a certain pay down of the mortgage.

I would say put down the required amount and not pay PMI.

I did another purchase that was an 80/20 on a primary. Not sure if that is done these days but that was back in 2006 with a local broker. That might be an option to avoid PMI. I paid closing and had two notes. Paid the 20 off quickly and then worked on paying off the 80.

Jeff B. · Answer

PMI protects the lender ... the loan and if you default, the lender gets the benefits.

Previously, once your LTV was less that 80%, it was possible to apply to have pmi removed, but many loans today run forever and the only way out is to refi (and they get you for fees again).

Mark F. · Answer

Julie Marquez PMI was created so that lenders could offer loan programs with less than a 20% down payment. Banks historically wouldn't lend more than 80% of the value of the home, but as home values rose, it became tougher for many borrowers to come up with enough cash to do 20% down. PMI was created so that lenders could offer higher LTVs (which means lower down payments) while still keeping their risk in the deal at tolerable levels.

Note that PMI only applies to conventional financing (non govt backed, like FHA). If a borrower comes in with less than 20% down, then pays down the loan to 80% LTV, they can have the PMI dropped.

For FHA, the ongoing mortgage insurance is called annual mortgage insurance. Depending on how large the down payment is, the annual mortgage insurance could be dropped at 78% LTV or it may stay for the life of the loan.

Benjamin Von Blon · Answer

Interesting, I didn't realize there has been a change. It has been a few years since I have applied for a loan.

Chris Mason · Answer

If people weren't obsessed with the note rate, and the world were more honest, we'd just jack your rate up.

PMI is priced out as an interest rate anyways.

But the sneaky sneaks think that by having the note rate be 4.125% and then quote you the PMI as a $ amount, you won't realize that your actual, effective rate, is like 5.3%.

Julie Marquez · Answer

@Zack Karp That explanation was very helpful! Thank you!

Julie Marquez · Answer

@Charlie FitzgeraldThank you for that explanation, so helpful to see the math broken out. But you believe paying the (worthless) PMI will leave me with cash to do things that will get returns that will pay for the PMI and more. Once the loan is locked, the PMI doesn't adjust, correct?

I was under the understanding from my bank, that to drop the PMI, I would have to the the house reappraised for them to evaluate. It would be nice if it just fell off at a certain point.

Julie Marquez · Answer

Thanks for all the replies. @Benjamin Von Blon That makes sense now, though I still don't like the idea of paying it. I like Charlie's straight math to help answers those questions.

Why PMI?

Most Popular Reply