PMI: Not so bad?

Paying a few-hundred dollars in private mortgage insurance for a few years allows you to buy a home and build equity.

By MSN Real Estate partner Nov 5, 2013 9:33AM

© Eric Audras, PhotoAlto, AlamyBy Michele Lerner, HSH.com

 

Consumers don't always see the benefit of private mortgage insurance because the insurance protects lenders rather than borrowers. PMI is required for home purchases with a down payment of less than 20 percent and for a refinance when the loan-to-value ratio is greater than 80 percent.

 

"PMI makes a lender more willing to take on the risk associated with less home equity since the insurance will reimburse the lender if the borrower defaults on the loan," says Tim Mislansky, senior vice president for Wright-Pratt Credit Union in Fairborn, Ohio. "When you pay PMI, you're trading the payments for the ability to buy the home with less cash."

 

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PMI costs

A 20 percent down payment is just not realistic for a lot of people, says Joseph Montanaro, a certified financial planner with USAA in San Antonio.

According to the National Association of Realtors, the national median home price in August 2013 was $212,100, which would require $42,420 for a 20 percent down payment. If you saved $200 per month, it would take you more than 17 years to save for a 20 percent down payment, Mislansky says.

 

Paying a few-hundred dollars in PMI for a few years allows you to buy a home and build equity rather than paying rent for years while saving for a bigger down payment, says John Clifford, senior vice president of commercial operations for U.S. Mortgage Insurance at Genworth Financial in Raleigh, N.C. PMI payments vary according to the size of your loan balance, the percentage of your down payment and your credit score, he says.

This chart demonstrates how your down payment and credit score dictate your monthly PMI cost. Calculations were done via HSH.com's PMI calculator. They assume a 30-year loan at 4.21 percent and a purchase price of $212,100:

 

Credit score

Down payment

Monthly premium

Fair credit: 680 to 719

5 percent: $10,605

$154

Very good credit: 720 to 759

5 percent

$110.82

Fair credit

10 percent: $21,210

$97.04

Very good credit

10 percent

$76.36

 

"Other factors such as your debt-to-income ratio only impact your eligibility for PMI but not the amount you'll pay for it," Clifford says.

 

5 reasons to pay PMI

  1. Keep your cash: "It doesn't make sense to buy a house with a 20 percent down payment if that's all the cash you have," Montanaro says. "You need an emergency fund even more when you move into a house, because otherwise you could end up running up credit card debt to pay for repairs." There are a lot of 5- and 10-percent-down options out there today, he says.
  2. Mortgage rates are low. "A lot of people want to take advantage of low mortgage rates and buy before they rise," says Jeffrey Taylor, managing director of Digital Risk, a mortgage-processing service provider in Maitland, Fla. "You can get into a house for a lot less in the long run if you buy now while rates are low rather than wait to save for a 20 percent down payment."
  3. Buy before home prices rise: You can build equity faster if you buy when home prices are rising, Taylor says. But if you wait too long, your purchase may be delayed because your loan amount and required down payment will be higher.
  4. Take a tax deduction: "In many instances you can save $200 to $400 per year on your taxes by deducting your PMI payments," Clifford says. "However, there are income qualifications so PMI is only fully deductible if your income is at or below $100,000" (if you file taxes as a single person, head of household or married filing jointly).
  5. You can cancel it: By law, your PMI will automatically end once your mortgage balance has been paid down to 78 percent loan to value, Taylor says.

 

It will take a little more than nine years to eliminate PMI with a 5 percent down on a $212,100 home with a 30-year fixed loan at 4.21 percent, seven years with 10 percent, and less than five years with 15 percent down.

 

If home values have gone up since you purchased, Taylor recommends getting your home appraised to perhaps eliminate PMI even earlier.

"PMI shouldn't be the driver of your decision of when to buy a home and how much to spend, but it should be part of the calculation," Montanaro says. "If you need PMI, that should just be part of your budget."

 

More from HSH.com

 

Tags: loans
 
26Comments
Nov 21, 2013 10:07PM
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Nov 20, 2013 12:48PM
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Yes but unfortunately my loan got to 80% and the bank said "Oh sorry we're not removing your PMI unless you get another appraisal to prove your house is still valued at its original amount." What a kick in the pants. I borrowed agreeing to pay PMI when I knew if I paid double payments for the first few years I could get rid of that worthless, bank lining, fee - might I add that my credit score is over 700 and I have already paid off one mortgage, when I hit 80%. Now I get an appraisal and low and behold the bank appoinnted appraiser says my house is not worth enough to get rid of the PMI. That is a conflict if I've ever seen one. The consumer these days has no chance. I have paid every payment + extra for 6 years never late, and I am still considered a risk to the back. BS - it is total BS.
Nov 20, 2013 12:07PM
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Since when is 680 to 719 just a fair credit score.  Your nuts especially in this day and age there are a lot more people with bad credit than not.
Nov 20, 2013 11:00AM
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This is how we got in this mess. People could barely pay there mortgages. Then when the price went down. They said we are underwater. So people walked away from their houses. Which drove the prices down. Then even more and more forecloses.
Nov 20, 2013 10:13AM
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Be careful with FHA loans. You can't remove the PMI until the loan is at least 5 years old and the loan balance is below 80% of the ORIGINAL appraisal value, not the new appraisal value. Stay thirsty my friends.
Nov 20, 2013 10:06AM
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Effective this past July FHA loans have permanent PMI according to this Fortune article.  If link doesn't show Google/Bing  FHA's solvency plan isn't fair.

http://finance.fortune.cnn.com/2013/05/02/fhas-solvency-plan-isnt-fair/



Nov 20, 2013 9:00AM
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There isn't any situation IMO, where it is good thing to throw hard earned cash at a worthless Insurance.

There aren't any gains to the consumer, but the mortgage insurers have fat pockets.

Nov 20, 2013 8:50AM
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Don't forget, PMI premiums are deductible if you itemize your tax return!
Nov 20, 2013 7:56AM
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I accelerated my payments to get below the 20%, canceled the PMI and used the PMI part to decrease my principal quicker. I have already eliminated 6 years from my 30 year mortgage. 
Nov 20, 2013 7:25AM
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Yes, indeed... where were all the PMI payouts after the housing bubble burst??? I never heard of one incident where PMI ever came into play.
Nov 20, 2013 7:08AM
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During the meltdown banks crashed and so did many PMI companies.  As the PMI companies went out of business so did the insurance monies on these loans which also contributed to the meltdown.  It was a domino effect.  I agree the numbers in this article are not realistic.  PMI discussed in the article is for conventional loans.  PMI on an FHA loan has increased at least 3x since last year making FHA loans almost unaffordable OR allowing borrowers to purchase a much lower home price.  Once PMI is injected as a factor, the $250K home a borrower thought they could purchase drops to about $180K.  PMI should be considered when purchasing a home but I don't think it should deter someone from home ownership. FHA mortgages nationwide now require you to pay PMI for 11 years regardless of when the loan reaches 20% equity.  Years past it was a 5 yr required period or when the loan reached 80% loan to value it would cancel out automatically.  All in all banks are still making a ton of $$$$$$$$$ and the borrower pays heavily for their mistakes and negligence.  A good mortgage originator will weigh both loan programs and let the borrower decide. 
Nov 20, 2013 6:46AM
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Those figures are still for conventional loans though, and 10 percent down isn't likely for many people either.  I bought my first home 2 years ago.  FHA loans have a higher PMI.  I paid 180k and my credit score was hovering near 800, and I just refinanced to take advantage of my increased home value to ditch the PMI which was 165 a month!  It was 13 percent of my total house payment.  I understand what the article is saying and agree with many of its arguments but I do not find those numbers realistic based on my realtiy.
Nov 20, 2013 2:18AM
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I never heard much during the housing meltdown how PMI insurance affected things. I'm sure all or most of these sub-prime loans people were defaulting on had PMI insurance. So how much of a loss did lenders take on all these forclosures? Did they profit by collecting on the PMI isurance, taking possession of the property, and then selling it for whatever they could get out of it? Possibly lowering house values because they could sell for pennies because they had already collected their money from PMI.
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