PMI & PMS

by A Blinkin on November 1, 2011

It’s that time of the month. Your stomach is in knots. You’re in a horrible mood. Your underwear looks like a crime-scene. Leona Lewis can’t even describe the bleeding that’s going on.

Grossed out yet? Well you shouldn’t be. It’s not what you think.

I’m simply describing a 25-year-old male getting ready to make his mortgage payment. Let’s call Mr. 25-year-old, Richard.

The Similarities

Richard dreads making his mortgage payment, which comes once a month.

Richard often has to dip into his secret stash of cash (which sits in his underwear drawer) in order to make his mortgage payment.

He keeps bleeding. Keeps keeps bleeding, money.

Why? The dreaded PMI.

The American Dream Right

A long time ago, home ownership used to be a dream. People put together a plan, saved up a sizeable down payment, and plunged into a home purchase. Somewhere along the line, this privilege was mistaken for a right. With the high cost of renting, everyone deserves to buy a house; even those who don’t have the income or discipline to save. (sorry, ranting..)

The conventional mortgage required a 20% down payment by the borrower, while a bank/lender financed the other 80%. Now all conventional wisdom is out the window.

If you wanted to purchase a $150,000 home, you would need to build up a down payment of $30,000. Now, with the emergence of PMI, you only need $7500 to “afford” this new home. Cool, right?

What is PMI?

Private Mortgage Insurance (PMI) protects a lender from default. It is typically required on any loan that is over 80% of a home’s value.

The Benefits

PMI allows people to buy a home with as little as 3-5% down payment.

The Bummer

According to Bankrate.com, PMI “typically amounts to about one-half of 1% of the loan…and mortgage insurance premiums are not tax deductible.”

Most lenders won’t notify you of the extra payment you’re sending each month. Once your Loan-To-Value reaches 78% it is YOUR job to notify your lender.

The Tampon (Solution)

Don’t buy a house until you’re ready, period.

 

Tagged as: mortgage, private mortgage insurance

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  • Little House

    Excellent point and I love your Tampon Solution! It’s exactly why I don’t own a house yet. In my neck of the woods, I need $72,000 saved up to buy a moderate fixer-upper. I just don’t have it so I’ll keep renting, for now.

  • http://onecentatatime.com Onecentatatime

    And this PMI increases your monthly payment.

  • Pamela Webster

    Well, you got my attention!

    Actually, PMI is tax deductible until the end of 2011. And when your LTV reaches 80%, you can have PMI removed but you have to notify the lender. Once your LTV reaches 78%, the lender must remove PMI whether you contact him or not.

    There is an alternative to PMI and that’s using a down payment assistance program through a nonprofit organization. You’ll need to meet their income guidelines and probably have to complete home buyer education (never a bad thing in my book). But it can lower your costs get you in a house sooner.

    Keep spreading the word. It’s amazing how many people are excited to find they can get a mortgage with a low down payment but don’t notice the PMI charge.

    • Anonymous

      I’m glad you made the correction regarding the required LTV. I want to say there’s another stipulation – “80% or paying on the loan for 5 years” – but I’m not sure of specifics (and don’t feel like looking it up) – so maybe you can clarify on this as well.

      Thanks for visiting :)

    • Aks434

      There is one more alternative. Paid up MI. One can pay MI as a onetime premium at the time of purchase. It is. 0127% or. 01667% of loan for 10% or 5% down. With 4% fixed rate for 30 yrs it works much better. It is recipes in 3 yrs or so.

  • http://www.financialexcellence.net Matt Wegner

    Great points and I totally agree with you. This idea of everyone “deserving” home ownership and a college education has resulted in way too many people jumping into “investments” that they can’t afford. This then increases the poverty level and creates people who are mad at the “1%” (really, the 20%) who figured it out and made smarter decisions with their money to get into the “1%”.

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