It strikes me that private mortgage insurance has to be the largest insurance scam around, with the possible exception of life insurance for kids and mortgage life insurance. Of course, you can’t be required to purchase those two.
My mortgage is roughly one-tenth of my (term) life insurance coverage. I pay about $350 annually for life insurance, and $57 monthly for PMI, $684 annually. Given those figures, isn’t it the case that, actuarially speaking, I’m almost 20 times more likely to default on my mortgage than die (although I suppose that’s not bad news)? Now, I’m relatively young and in good shape, but if there’s a 0.5% chance that I will die this year (hypothetical–I didn’t look it up), can there really be a 10% chance that I’ll default?
I have an outstanding credit record, a solid job with a relatively large income, virtually no debt outside of the mortgage and lots of savings. In my mind, there’s virtually no chance I will default on the mortgage–how come the actuaries differ? Is it just because they can, and can screw me in the process?
I was watching a blurb the other day about what a scam it was. Many people don’t know, however, tht you may cancel it after a certain amount of equity has been reached. The trick is, you have to know when you can do it, then inform your mortgage company.
I do remember that if your mortgage was started in 1999 or later, you are better off, because they changed the rules.
It might be cheaper to by term insurance over the life of the mortgage, for the amount of the mortgage, in case you croak. Then the survivors aren’t stuck with a house they can’t afford the payments on. Or maybe not, I am not in insurance, and probably don’t know what I’m talking about. Talk to your agent.
I hate to tell you this, but this is insurance is much worse than children’s life insurance or mortgage life insurance (as bad as they are). PMI insurance isn’t for you! It is designed to convince the lender to give you the loan when you put down less than 20% of the value of your property. This insurance pays off the lender if you default. It doesn’t give you any implicit rights. If you are in debt up to your eyes in credit cards and default on your loan, the insurance will pay the lender, but the insurer will then come after you for the value they paid. Don’t mistake this type of insurance for anything that you can take advantage of as a homeowner. In fact, it is in your interest to get it dropped as soon as you own 20% of you current residence.
Yeah, it sucks but there’s not much you can do about it until you get that 20%
Remember though, it’s 20% of the value of your home. If you are reassesed and it goes up, that counts toward your
equity. Home improvements also increase the value of your home. Course then you pay higher property tax, so pick your poison.
Another way around it is to get an 80% loan on your house, then a 2nd mortgage for anything over the 80% you need. Your primary lender cannot force you to get PMI since your primary is at 80% (YMMV, check local laws). You will pay a higher rate on the 2nd mortgage than the first so your monthly payments will about the same as with PMI, but at least that extra $100 or so will go towards equity.
Correct, but not 100% correct. Some mortgages dictate that PMI be kept during the entire mortgage!:eek: Be careful of what your signing into my friends. And no matter what, always have an attorney represent you when buying real estate! Always!
PMI is like pumping gas into another guys car! You pay the premiums but it’s the bank that is protected! It does the mortgage holder no good at all! You wouldn’t believe how many people (idiots:rolleyes: ) think they can stop paying their mortgage one day because their PMI policy will pay it for them! The “dumbing down of America” has really helped companies who underwrite PMI policies.
Do the math! What the hell are people doing buying a house without the lousy 20% down in the first place? If you can’t come up with 20% you’re buying a house you can’t really afford! Drink a little less beer, stop going to fast food joints and first run movies for a little while and save up a bigger down payment. It won’t take as long as you think, and your payment will be much lower! Not to lecture but I know far too many people who are in the bucket because they bought more house than they really could afford!
Well, look at it from the Bank’s perspective. (I’m not a banker, btw)
Lately, Americans have been taking out mortgages based on recently inflated property assessments. If these people should default in the upcoming recession, the bank would be stuck with houses that would be worth considerably less than their assessed value. (Assuming the housing market hits a down cycle)
PMI helps keep banks from being stuck with bad loans. If you owned 20% equity and defaulted, the 20% equity lessens the blow to the bank when they try to resell your property. But if you had almost no equity and defaulted, the bank is screwed, since they lose any decrease in value and are out all the costs associated with reselling.
All of the above (well, most of it) is true, and is nothing new to me. The fundamental question, however, is how can the ratio of premium to expected payout be so outrageously high for PMI? Again, for the same dollar of premium, I get roughly 20 times the coverage for my life insurance than I do (ok, the bank does) for PMI. I truly doubt that I can be considered 20 times more likely to default than to die. How do the actuaries get away with it?
Good question, johnson. I’m wondering the same thing, and I’d like to add a related question: What percentage of PMI premiums actually wind up being used to reimburse banks for defaulted loans?
Additionally:
No offence, but what the Hell are you talking about? Let’s take an example: me. We were paying $750 a month for an apartment. Two years ago we bought a house (with 5% down) that was twice as big, with a mortgage that required (principal + interest + escrow + PMI) about $1200 a month payments. Since a major chunk of our current payments are interest and property taxes, we can itemize the cost on our income taxes, so our “true” payment per month is like $850 or so. So we’re paying an additional $100 a month, while our house has increased $40,000 in value in the past two years, and now we do have 20% equity.
Now, you do the math: How big of a return on investment did we get for opting to spend the extra $100 a month to buy a house rather than rent? Bonus trick question: If we had opted instead to continue renting and save $100 a month toward a down payment, and our dream house had continued to increase in value at a rate of $20,000 a year, how long would it have taken to save the 20% down payment? Bonus so-what’s-your-point question: Whatever our ability to save a down payment, in what way would we have been better off by waiting to buy until we had 20%?
If your point is merely that some people don’t look before they leap into a major financial obligation, then sure; I agree. If your point was that buying a house with less than 20% down is stupid, then I don’t.
The increase of property tax based on a new assessment will depend on where your property is located. In California, with the passing of Proposition 13, changes in property tax are calculated through an acquisition-value assessment system. It provides that property is to be assessed at its value when acquired through a change of ownership or by new construction.
Also, most PMI companies will accept a brokers opinion form instead of the assessment. If you are in good with your real estate broker this can save you the $300 or so that you would need to spend for an assessment.
Having just gone through the process of getting out from under PMI I can warn you that companies don’t like to give up the income and there are hoops through which you will be jumping - but it is so worth the 18 months of payments that will be eliminated by our applying the former PMI payment as a prepayment on our mortgage.
I agree that PMI is a total ripoff. And I agree that the premium seems to overstate the risk of default.
But in defense of PMI (uh-oh, looks like we’re heading to GD), I would point out that a house purchase is in many ways analogous to buying stock on margin. A general market decline combined with a dramatic increase in unemployment (and of course the two are correllated), could cause serious problems. These would be tremendously exacerbated if many home-buyers were buying with 10 or 5% down.
Home prices have risen dramatically in recent years, so it’s difficult to really evaluate the risk being assumed by companies that provide PMI. It seems very low, but if the economy goes into a serious recession, you may see PMI providers screaming to be bailed out!
No, well I’ve got one. Are companies that provide PMI unusually profitable? And if they are, why do there not arise companies which charge lower rates or give kickbacks to lenders or otherwise try to gain market share by taking a slightly smaller unusually high profit?
That’s part of my point. However, your concept of the “tax write off” as a money saving device is a fallacy. Edith Lank, the ral estate expert, consistanly advises people that it is rarely a positive to maintain a mortgage debt for the benefit of a tax write off. Of course, the intrest rate on the mortgage, and current intrest rates, taxes, etc all have to be figured in to see what is better: paying off the mortgage, or keeping it for the write off.
Yet another loophole for the mortgage companies… If you get a mortage with less than 20% down and then later get an equity loan taking your Loan to Value ratio to 90% or 100%; watch out if you decide to refinance your first mortage to attempt to drop PMI. The mortgage companies will take into consideration your new equity loan and refuse to drop PMI. This is outrageous, as their first position mortage is well secured (assuming the equity loan is with another lender).
If you do it in the order presented by jk1245 you could avoid PMI, but assumes you could muster the 20% at least temporarily until the equity loan is granted.
Even more fun is the cost of title insurance, 80k mortgage will cost almost $700 in title insurance and I have only ever seen one claim for title insurance to pay out and the company fought it for over a year!
I recently financed a house using an 80% first mortgage with no PMI and a 10% second mortgage, also with no PMI, but at a significantly higher interest rate (about 2% per year higher than the first mortgage). This is commonly called an eighty-ten-ten in industry lingo. Or at least that’s what my realtor kept calling it. I was able to this all in one transaction at the closing of the house, so there was no need to even temporarily come up with the 20%. Interestingly, my mortgage broker didn’t mention this option until I pointed out that I that PMI was an unacceptable scam.
This kept me out of paying PMI, and while the increased interest rate on the second trust kind of sucks, at least the interest is tax deductible (unlike PMI). Also, because the 10% loan is a “reasonable” size, it will be easy to pay off early once (hopefully) my cash flow improves.
I think creative financing options like this are the market’s response to consumers realizing what a rip-off PMI is and demanding something better.
I think we all agree you shouldn’t buy more house than you can afford. But there are real estate experts, and there are real estate experts, and I’ve run into many who believe you shouldn’t pay a red cent up front if you can possibly avoid. Let’s just say that paying less than 20% up front is at least a defensible position, k?
I just bought a house last month. At the risk of offending pkbites’ notion of the proper down payment, I went with 5% down. I went from a 1-bedroom apartment ($975/month) to a 4 bedroom, 3-1/2 bath townhouse (P+I+PMI = $1135/mo). And in a much better neighborhood to boot. Of course the monthly nut is higher because of the HOA fee and property tax, but it is still something I can handle.
Also, I intend to save money via the “tax write-off.” I’m not sure why a real-estate agent would disparage this. It won’t be to my advantage to itemize this year, having bought so late in the year, but I guarantee you my income tax burden will go down because of home ownership.
Tell me again how this is a bad deal for me?
re: 80/10/10 loans (or even 85/15/5). I seriously considered going this way to get out of PMI, but running the numbers actually led me to stick with the PMI (and yes, I had a CPA do it). The interest on the second loan was just too high to make it a better deal. This surprised me.
I apologize for not addressing the GQ. I generally don’t encourage hijacks like this in GQ.
Don’t assume that the tax benefit will be negligible (if you’ve run the numbers, I accept your statement). We closed on Halloween, and the deductible expenses for interest and closing costs were still enough that they made a huge difference in our tax liability for the year. Not as much as the next year, when we had a full year of interest payments to deduct (and given that this was the first year of a 30 year mortgage, almost our entire mortgage payment went to interest instead of principal), but still a surprising amount.