“A simple fact that is hard to learn is that the time to save money is when you have some.” —Joe Moore
Saving money is the cornerstone to building wealth.
Granted you have to have some to actually save some of it.
Regardless, the time to save is when you have it.
An ever better way to save money is to avoid doling it out in the first place. If you can slash or cut out expenses entirely, you can accumulate more wealth faster.
Buying a home is one of the reasons why people save money because buying one is expensive.
If you read my post, Home Buying: Survival of the Fittest Wallet; then you understand what I mean about home buying.
Every dollar that you do not have to send out ultimately stays in your wallet.
A great way to save on money you spend on your home is to eliminate the cost of mortgage insurance, which is known as PMI.
What Is PMI?
Private mortgage insurance is something lenders use to protect their investment in your home. Until you own it or have put down a reasonable down payment, the bank wants to protect its property by making you pay insurance on it.
Most lenders require PMI if a homebuyer does not make a down payment of 20% of the home’s purchase price – or, in mortgage-speak, the mortgage’s loan-to-value (LTV). This LTV ratio is in excess of 80% (the higher the LTV ratio, the higher the risk profile of the mortgage).
Meaning if you owe anywhere above 80% of the home’s value, then you are considered risky and are a candidate for PMI.
For example, if you purchase a home for $250,000 and are unable to put down 20% ($250,000 x .20 = $50,000); thereby, owing more than $200,000 to the bank, then you would need PMI.
And unlike most types of insurance such as automotive or renter’s, the policy protects the lender’s investment in the home, not yours.
However, PMI makes it possible for people to become homeowners sooner because they can put down less than 20% such as 5% and still purchase a home.
FROM RENTER TO HOMEOWNER
PMI allows borrowers to obtain financing if they can only afford (or prefer) to put down just 5% to 19.99% of the residence’s cost, but this ca be costly.
The home will now come with an additional monthly cost.
Borrowers have to pay their PMI until they have accumulated enough equity in the home that the lender no longer considers them high-risk.
Homebuyers who put down less than 20% of the sale price will have to pay PMI until the total equity of the home reaches 20%.
This means you have to pay 20% of your home’s value or have enough equity to build to that amount before PMI is no longer required. This can take years.
And your heirs also get nothing out of this.
Unlike most insurance policies, all proceeds go to the bank. The heirs get nada, zip, zero, nothing.
The lending institution is the beneficiary. PMI only helps the mortgage lender.
It is also not cancelled automatically.
You have to draft a letter to the lender explaining that the LTV of the home is now 80% or less. This usually requires getting an appraisal done. This could take months!
Or the other hand, if you wait until it automatically cancels, you would have to hit 22% equity. That is a full 2% higher than the 20% that is mandatory!
Meaning you essentially paid 2% more or $5,000 that was not even required!
Some lenders even request that you pay for a certain time period. So, if your home goes up in value and just absolutely skyrockets, you could zoom past the 20% minimum needed, but still be on the hook to pay.
How fair is that?
It’s like that scene out of Wedding Crashers, “I earned those miles.”
Now let’s talk the cost of PMI.
HOW MUCH IS PMI?
PMI acts just like the Red Hot Chili Pepper’s song Give it Away, in that you are giving this money away to insurance companies and that’s it.
PMI can cost on average between 0.05% and 1% of the entire loan amount annually. In some cases, maybe even more.
This means if you purchase a home for $250,000 and owe 1% annually for PMI, you will have to fork over $2500 per year. This equates to $208 monthly!
The more house you buy, the more the cost goes up.
If it takes 5 years to build up enough equity in the home to stop paying PMI on a $250k mortgage, that would mean paying $208 x 60 (months) = $12,480! And that money is burnt. You cannot get it back.
Did I also mention that as of 2018, PMI is no longer tax deductible?
That’s right. Insurance is just in case. And in this case, that is like throwing out two hundred dollar bills out your car window once a month!
So, you have to find a way to roll up those windows and plug that money leak.
HOW YOU CAN SAVE $10,000 BY AVOIDING PMI
You have to find a way to keep your money in your pocket and not the insurance companies.
Better yet, find a way to not only keep it, but make money with it.
Putting that $208 into stocks over the course of 10 years could net a return of over $37,000 with an 8% return!
If you can avoid PMI all together, you could save yourself over $10k!
For example, let’s say you have to pay $250 per months for 4 years, that is $250 x 48 (months) = $12,000.
In order to save $10,000, you would need to eliminate paying $208.33 a month for 4 years, that is $208.33 x 48 (months) = $10,000!
HOW TO AVOID PAYING PMI
There are a few ways to avoid paying PMI and they are the following:
- Put down a 20% down payment.
- Lender paid mortgage insurance (LMPI) where the cost of the PMI is included in the mortgage interest rate for the life of the loan.
- Get a piggyback mortgage where a second mortgage or home equity loan is taken out at the same time as the first mortgage.
- Find a lender willing to forgo PMI.
The last one is a little tricky.
There are not many places I could find that allowed this. However, there are some financial institutions that will offer a 100% conventional mortgage without PMI. You will just need to do an online search in your state.
So, there you have it.
I have showed you several ways to avoid PMI.
Now, I have saved you $10,000!
What is my fee for this service?
Only for you to share this with someone else. And by doing so, help them save $10,000 as well.
She then takes a bow and says thank you for taking the time to read this post. I’ll be here all week!