What is PMI and why am I paying it? I get this question a lot. PMI (Private Mortgage Insurance) is insurance the bank MAKES you have if you put less than 20% down on your home purchase. Before the 2007, it was common for people to put 0%, 2%, 5% or 10% down on a home purchase, which would have been unheard of when your parents bought their home. They had to put 33% down.
Without boring you with a lot of housing finance history, the big boys at the banks needed more mortgages to carve up and resell in the form of CDOs in the 2000s, and to entice people to take out mortgages, they let people put less (sometimes zero) down. Now, after getting a good thumping in the great recession, banks seem to be back to letting people take out mortgages with almost no money down, which means you should understand PMI.
PMI can vary based on the amount you put down and, of course, the size of the loan. It can be anywhere from 0.3% to 1.15% of the amount of the loan per year. The yearly amount is then divided by 12 (months) and you pay the resulting amount per month on top of your mortgage. But, whatever the amount is, you would rather have that money in your pocket than in some insurer’s hands.
The key about PMI is you do not have to suffer under it forever. PMI will naturally go away when your equity level rises to about 22%. How, you ask? If you put down $100,000 and your home cost was $1million, you put down 10%. After years of paying off interest first and then principal, you will have paid a bunch of interest and at least an additional $120,000 of principal bringing your ownership equity to $220,000 or 22% of the ORIGINAL value of your home when you bought it.
OR (and this is a big OR) your house will have increased in value, and you can ask the bank to cancel your PMI because you effectively own 20% of your home. You can also refinance and NOT have to pay PMI at all. Notice that the threshold if you go ask the bank to cancel it or refinance is 20% and if you have to wait for them, it’s 22%. (These rules are for non-FHA loans, this is a good resource if you have an FHA loan).
Aside from the 2% difference, the BIG DIFFERENCE is that housing prices in many areas of the country are going up faster than you are paying down your mortgage. Thankfully, it does not seem like we’re in a crazy bubble like 2007, but property values are going up.
What do you do? Check Zillow, Trulia, Redfin or whatever real estate site you like and see what your home is worth. I suggest checking several of them. When you think you have a consensus estimate or average, look at your last mortgage statement and see how much is left on your mortgage (principal).
If your home seems to be estimated at $500,000 and your principal balance as of your last statement is $378,245, do this: $378,245/500,000. It equals .756 or 76% to you and me. That means in my example, the owner has 24% equity.
If you own over 20% of your home if it were appraised right now due to an increase in property value, you should consider refinancing. You can also call the bank that holds your mortgage and ask them about their process to get PMI waived, but generally, they will not let you use a current appraisal (why should they?). The best way to get rid of it is refinancing.
Now, before you go dialing your mortgage broker, remember, there are points and fees to refinancing and you have to do the math to see if getting rid of your PMI is still worth it, but it is worth looking into and doing the refi math. Next week, I will talk about refi math and why and when you should consider refinancing.