Author Topic: How bad is PMI? Be honest  (Read 8867 times)

rubybeth

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How bad is PMI? Be honest
« on: January 09, 2017, 02:42:24 PM »
DH and I have started the process of shopping for houses. We got approved for our preferred price range of home (max. around $150k) from three different lenders (a local credit union, a local bank that has relatively low closing costs, and a mortgage broker), and the total needed for closing costs/realtors fees plus our usual cushion fund is kind of freaking me out. I thought we were doing well to have 20%, but now realizing we'll need to have a significant chunk for closing costs and a cushion of cash.

I'm a weirdo who likes to have a nice cushion--like $5-10k, if possible, in cash (money market), for stuff like insurance premiums (we have a HDHP), car repairs, etc., and everyone who has ever bought a house always talks about weird stuff cropping up--like needing a new ____ right away because ____ broke right after they closed/moved in. Sigh. We make decent money but we do a lot of pre-tax savings so take-home pay is reduced. To have enough to pay for everything in cash plus have a cushion, we won't realistically have 20% down until late 2017, like Nov/Dec, which is not a great time to shop/move in our region (Minnesota). Most people list houses in the spring, it seems, and that's also when our lease is up (April for move out at end of June).

So I'm wondering, how terrible is PMI? Is it less terrible if we'd only be paying it for 2-3 years (like putting 10-15% down)? Better to buy now and lock in a reasonable ~4% interest rate vs. waiting until 2018 when who knows what will be happening? Of course the banks and our realtor want our money and aren't Mustachian in the least, so I'd love to hear thoughts from Mustachians. :)

Cwadda

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Re: How bad is PMI? Be honest
« Reply #1 on: January 09, 2017, 02:50:52 PM »
Ok, so I'm buying my house soon and what I'm doing in my contracts is a seller's concession. Basically the seller gives money back at closing. So say you bought a house for $140k, you'd offer $150k and ask for a seller's concession of $10k. This would cover all your closing costs :D

JLee

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Re: How bad is PMI? Be honest
« Reply #2 on: January 09, 2017, 02:51:33 PM »
I bought my house in Phoenix, AZ with 5% down (and PMI) in February 2013.  In mid/late 2016, I paid ~$110 for a BPO.  The house was re-valued and was quite close to the required 75% LTV to get out of PMI, so I made the ~$1500 principal payment and got out of PMI.  I ended up paying ~$65/mo in PMI for about 3 years, but got lucky and caught the housing market on its way up (my $140k house is now $180-200k).

I have no regrets, but it also just happened to work out well for me.

index

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Re: How bad is PMI? Be honest
« Reply #3 on: January 09, 2017, 03:10:12 PM »
The problem with PMI is it is very very expensive. Take JLee for example. JLee bought the house for $140 with 5% down (7k) so the loan was for $133k. They are paying $65/month ($780/yr) for an insurance policy to cover the remaining 15% (21k) of the down payment under 20%.  Assuming their loan is ~4%, they are also paying the bank $840/yr for the additional 21k on the loan. PMI + mortgage interest work out to be around they are paying $1620/yr to finance 21k.

This works out to 7.7% "interest". <- This is actually pretty cheap compared to a lot of PMI policies which generally work out to about 12% interest. Also, many banks are pretty stingy with letting you off PMI. They often require a full appraisal ($400-$500), two years of on time payments, and 25% LTV before they will cancel the PMI policy. 

JLee

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Re: How bad is PMI? Be honest
« Reply #4 on: January 09, 2017, 03:16:59 PM »
The problem with PMI is it is very very expensive. Take JLee for example. JLee bought the house for $140 with 5% down (7k) so the loan was for $133k. They are paying $65/month ($780/yr) for an insurance policy to cover the remaining 15% (21k) of the down payment under 20%.  Assuming their loan is ~4%, they are also paying the bank $840/yr for the additional 21k on the loan. PMI + mortgage interest work out to be around they are paying $1620/yr to finance 21k.

This works out to 7.7% "interest". <- This is actually pretty cheap compared to a lot of PMI policies which generally work out to about 12% interest. Also, many banks are pretty stingy with letting you off PMI. They often require a full appraisal ($400-$500), two years of on time payments, and 25% LTV before they will cancel the PMI policy.

That is why I went with a conventional mortgage instead of an FHA loan. It's been a while, but I'm pretty sure PMI on an FHA loan would've been closer to $200/mo.

I needed 25% LTV via BPO (~$110) or 20% LTV via appraisal (~$300) to drop PMI.  Due to the rental market vs buying market at the time, my mortgage/taxes/insurance/PMI was still about $300/mo less than renting an equivalent home.

SwordGuy

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Re: How bad is PMI? Be honest
« Reply #5 on: January 09, 2017, 04:18:28 PM »
Um, just to be clear, PMI is insurance for the bank that I pay for.   It provides zero value to me.   It offsets no risk for me, just the bank.

So, from that point of view, every single dollar of PMI is just money I piss away.

Literally, buying lottery tickets actually ARE an investment compared with spending money on PMI, because at least I might actually win something with the lottery.

Unless the above comment had to do with the risk of waiting and getting a higher interest rate...

In that case, interest rates are about as low as you're likely to get.  Do the math on an interest rate 1, 2, 3, and 4% higher and see whether PMI makes sense against waiting and paying a higher rate.


rubybeth

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Re: How bad is PMI? Be honest
« Reply #6 on: January 09, 2017, 04:23:51 PM »
The problem with PMI is it is very very expensive. Take JLee for example. JLee bought the house for $140 with 5% down (7k) so the loan was for $133k. They are paying $65/month ($780/yr) for an insurance policy to cover the remaining 15% (21k) of the down payment under 20%.  Assuming their loan is ~4%, they are also paying the bank $840/yr for the additional 21k on the loan. PMI + mortgage interest work out to be around they are paying $1620/yr to finance 21k.

This works out to 7.7% "interest". <- This is actually pretty cheap compared to a lot of PMI policies which generally work out to about 12% interest. Also, many banks are pretty stingy with letting you off PMI. They often require a full appraisal ($400-$500), two years of on time payments, and 25% LTV before they will cancel the PMI policy.

That is why I went with a conventional mortgage instead of an FHA loan. It's been a while, but I'm pretty sure PMI on an FHA loan would've been closer to $200/mo.

I needed 25% LTV via BPO (~$110) or 20% LTV via appraisal (~$300) to drop PMI.  Due to the rental market vs buying market at the time, my mortgage/taxes/insurance/PMI was still about $300/mo less than renting an equivalent home.

This would be a conventional mortgage, not FHA. I have just read so many horror stories about getting rid of PMI being such a hassle, and if we didn't have to pay it, why would we? No way to know what interest rates will do in the next 9-12 months, but I guess we could run some actual numbers and find out from the lenders how much PMI would be.

clarkfan1979

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Re: How bad is PMI? Be honest
« Reply #7 on: January 09, 2017, 06:19:54 PM »

To have enough to pay for everything in cash plus have a cushion, we won't realistically have 20% down until late 2017, like Nov/Dec, which is not a great time to shop/move in our region (Minnesota). Most people list houses in the spring, it seems, and that's also when our lease is up (April for move out at end of June).



Buying a house in Nov/Dec is a great time to buy a house (if the goal is to get a low price) because you will have very little competition. Buying a house in the spring/summer is the worst time for getting a deal because you will have a lot of competition from other buyers.

meteor

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Re: How bad is PMI? Be honest
« Reply #8 on: January 09, 2017, 06:27:14 PM »
Sorry, but I'm a strong believer that if you need PMI insurance, you should not be buying a house yet.

It's not about whether PMI is bad or good, or whether you are getting   a great deal on a house, etc... it's more about you thinking it's OK to buy something you cannot yet afford.

These things most likely will lead you to stressful situations and it goes against the MM mentality and habits.

bkmnky72

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Re: How bad is PMI? Be honest
« Reply #9 on: January 09, 2017, 08:35:08 PM »
I'd like to meet these aforementioned underprivileged dragons. 

adamcollin

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Re: How bad is PMI? Be honest
« Reply #10 on: January 09, 2017, 10:26:16 PM »
PMI depends on different factors such as loan term, credit score and down payment. Itís not a bad option if you can attain 20% equity for your home.

rubybeth

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Re: How bad is PMI? Be honest
« Reply #11 on: January 10, 2017, 06:38:41 AM »
PMI depends on different factors such as loan term, credit score and down payment. Itís not a bad option if you can attain 20% equity for your home.

Our loan term would be 30 years, our credit scores are both over 800 and we've both been in our fields for many years, though my husband just completed graduate school this spring, he quickly found work as in his field (mental health). Down payment would be most of the $32k we've saved, probably at least 10%, maybe 15% of the overall cost of the house, so we'd be looking at paying PMI until 2020.

I like the suggestion of just running the numbers on the interest rates now vs. slightly higher later.


Sorry, but I'm a strong believer that if you need PMI insurance, you should not be buying a house yet.

It's not about whether PMI is bad or good, or whether you are getting   a great deal on a house, etc... it's more about you thinking it's OK to buy something you cannot yet afford.

These things most likely will lead you to stressful situations and it goes against the MM mentality and habits.

That's pretty much how I am feeling. If we can't afford 20% down, closing costs, plus the cushion of funds I prefer to keep on hand ($5-10k), then we should wait. But also, our PMI rate would probably be pretty low since we're a great risk--I've been in my field for 18 years and the same job since 2009, husband for 7 years, and we have zero debt. Absolutely no debt--and the only debt we ever had was student loans which we paid off in around 4 years back in 2013. We are quite Mustachian in every other way, both drive very old cars and I walk to work year-round (my 2005 Focus only has around 80k on it), we put my husband through grad school without loans, we aren't really spendypants in any other way. We also don't have kids and don't plan to have any.


To have enough to pay for everything in cash plus have a cushion, we won't realistically have 20% down until late 2017, like Nov/Dec, which is not a great time to shop/move in our region (Minnesota). Most people list houses in the spring, it seems, and that's also when our lease is up (April for move out at end of June).



Buying a house in Nov/Dec is a great time to buy a house (if the goal is to get a low price) because you will have very little competition. Buying a house in the spring/summer is the worst time for getting a deal because you will have a lot of competition from other buyers.

Yes, I understand that it's a good time for bargains, but it's not a big time for people to be putting their houses on the market in our area unless they absolutely have to, so our options are limited. We're also of the firm belief that we won't buy a house unless it meets our requirements and, primarily, location for me to continue walking/biking to work--which limits us pretty dramatically. However, me being able to walk/bike over the last 8 years has likely saved us thousands on gas/vehicle maintenance. We'd also be looking at either paying more to go month-to-month on our apartment lease, or having to pay two months worth of rent to buy ourselves out of our lease, so I could run the numbers on that piece. Also, moving in Minnesota in the winter just sucks--I've done it, and I would prefer not to do it again. :/
« Last Edit: January 10, 2017, 06:41:01 AM by rubybeth »

NoStacheOhio

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Re: How bad is PMI? Be honest
« Reply #12 on: January 10, 2017, 06:49:44 AM »
Probably heresy around here, but have you considered dialing back your pre-tax contributions while you're in the process of buying the house?

Cwadda

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Re: How bad is PMI? Be honest
« Reply #13 on: January 10, 2017, 07:10:50 AM »
I am planning on buying a multi family with 3.5% down FHA financing, owner occupied. The property will be cash flowing. The PMI is quite high but if you factor it in to your numbers, does it really matter? You could refinance out of it after some time.

Would this be a bad idea? I look at it as the ONLY way to get a multi family with less than 25% down. For a $300k property we're talking about a downpayment difference of $10,500 vs. $75,000! I think the PMI is worth it in this case - almost no cash out of pocket!

rubybeth

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Re: How bad is PMI? Be honest
« Reply #14 on: January 10, 2017, 10:19:41 AM »
Probably heresy around here, but have you considered dialing back your pre-tax contributions while you're in the process of buying the house?

I've thought about it, but it doesn't help all that much, because we end up paying more in taxes if we don't do the 457b/401k contributions. It might put another $500/mo. into cash savings in the short term, but that doesn't make a big enough difference in our ability to save up ~$45-50k. A lot of our pre-tax savings is also to HSAs and a pension, which aren't optional.

kandj

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Re: How bad is PMI? Be honest
« Reply #15 on: January 10, 2017, 11:33:25 AM »
Can you buy out PMI? Although I have not heard of many people doing this, I am not sure why.

Husband and I bought a house last year with 10% down on a conventional loan to keep some cash for fixing up. We bought out PMI for somewhere in the $2000 range. (although our sellers closing contribution did end up covering some of that cost for us) We did the math and it was going to save us money because whatwe paid to buy it out was 35 months or so of PMI payments and we wouldn't have hit the threshold to drop PMI by that point.

Dicey

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Re: How bad is PMI? Be honest
« Reply #16 on: January 10, 2017, 05:57:57 PM »
Aquire PMI in haste, repent at leisure.

IIRC, in my state, all those pesky costs and fees get folded into the package, and then the DP is calculated. Some will smartly say it's better not to fold them into the loan, but if it helps you avoid PMI, you're probably miles ahead. Posting to say you have better deal opportunities in the winter, when there is far less competition. I vote for talking with your lender to get a better understanding of the process and save what little else you may (or may not) need first.

Full disclosure because I've posted this elsewhere. I felt the same way you did. Wanted to keep a bunch of cash reserves when I bought my first house. Was told it was "no problem" to only put 10% down. I did so, not really understanding PMI. I'm FIRE now because I started down the RE path, but I did not like having PMI, Sam I am, even though it was much cheaper way back when. It does not protect you, it doesn't really even protect the lender. As you progress through the home buying process, you will discover there are many devices designed to separate you from your money that you "must do"* to get your loan. Don't let PMI be one of them.

Example: Sold a house with a tile roof. Roof inspector found some cracked tiles. DH fixed them, but was pretty suspicious that the inspector had stepped on the roof improperly, causing the cracks because they weren't there before the roof inspection. Was that good enough? No! We had to pay the same company to re-inspect our work before they would sign off on the report. Fucking racket. Second time, DH was there and made sure no more tiles got cracked. And doing ourselves cost us $0 OOP vs. their $350 estimate, so I guess we still came out "ahead". Gah!

And don't get me started on home inspections and pre-paid home warranties. They are far less helpful than they want you to believe. Even hiring your own inspector doesn't offer full protection, but it's better than going with an unknown firm.

birdiegirl

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Re: How bad is PMI? Be honest
« Reply #17 on: January 11, 2017, 01:25:16 PM »
I'd second the recommendation to ask for a sellers concession to cover the closing costs (about 3% of the sale price).  We bought in the suburbs of Mpls this summer and our realtor, broker, etc. said it is very common to see that in this market at all price ranges.

You also mentioned realtor fees in your original post?  Is this for selling another house?  You shouldn't need to pay realtor fees as a buyer
« Last Edit: January 11, 2017, 01:29:10 PM by birdiegirl »

blahblahblah

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Re: How bad is PMI? Be honest
« Reply #18 on: January 11, 2017, 02:04:04 PM »
I think that depends a bit on the market where you are... we came in with less than 5% down and a PMI bill of over $200/month BUT are in a region with rapidly growing rents and the mortgage/PMI/tax bill is almost identical to our previous rent.  So despite the idea that we are throwing away that money I see two lesser evils that come from it 1) at least there is a tax deduction 2) for the same dollar amount I am gaining ownership vs renting.

Fortunately our debt snowball attempt has been mostly successful so the PMI will be off before the end of the second year of mortgage, meanwhile a 1 bedroom apartment in the area now costs more than the mortgage/PMI/tax payment.

neo von retorch

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Re: How bad is PMI? Be honest
« Reply #19 on: January 11, 2017, 02:24:53 PM »
Agree with LOOL. Could have sold a bunch of investments to cover the spread, but instead I just cashflowed some mortgage principal paydown for the first 6 months of my mortgage to get rid of PMI (which was $97 on a $332k mortgage.) Could I "not afford" the house?

rubybeth

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Re: How bad is PMI? Be honest
« Reply #20 on: January 11, 2017, 04:15:29 PM »
Agree with LOOL. Could have sold a bunch of investments to cover the spread, but instead I just cashflowed some mortgage principal paydown for the first 6 months of my mortgage to get rid of PMI (which was $97 on a $332k mortgage.) Could I "not afford" the house?

Yeah, we do have some taxable investments that I've thought about selling, but then I think, ugh, maybe I don't want a house enough to do that. :P That also seems like a really low rate of PMI! The mortgage calculator I've been using estimates PMI at 0.625%, or around $67/mo on a $150k house with $22k down. I can ask the various lenders what the PMI would be, but I suspect they would just be estimates and not very useful until we actually find a house we want. Which we haven't remotely found. :/

I'd second the recommendation to ask for a sellers concession to cover the closing costs (about 3% of the sale price).  We bought in the suburbs of Mpls this summer and our realtor, broker, etc. said it is very common to see that in this market at all price ranges.

You also mentioned realtor fees in your original post?  Is this for selling another house?  You shouldn't need to pay realtor fees as a buyer

Yes, we could certainly do that, but we would still need quite a bit more money to have our "cushion" of funds. Clarification on realtor's fees: I guess I just mean closing costs and an independent inspection, plus money for any immediate updates (paint, anything else cosmetic that would be easy) and what I think of as our "cushion" or $5-10k. I'm fine with only $5k as a renter, but I have heard so many horror stories of buying a house and finding out it's uninsurable because the roof is bad, or a huge thing breaks right away, so I'd be more comfortable having cash on hand vs. tied up in the house, at least the first year or so, until we get a handle on how much utilities cost.

talltexan

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Re: How bad is PMI? Be honest
« Reply #21 on: January 12, 2017, 08:22:18 AM »
Many mustachians are averse to debt of all types. This aversion typically increases with cost, and--as far as I can tell--PMI is among the costliest forms of debt.

rothwem

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Re: How bad is PMI? Be honest
« Reply #22 on: January 12, 2017, 08:53:22 AM »
Agree with LOOL. Could have sold a bunch of investments to cover the spread, but instead I just cashflowed some mortgage principal paydown for the first 6 months of my mortgage to get rid of PMI (which was $97 on a $332k mortgage.) Could I "not afford" the house?

That is a killer low PMI.  I bought my place pre-mustachianism and my monthly PMI is $168 on a 253k loan. 

Anyways, my effective interest rate with PMI is 5.0x%, which isn't too bad.  I can refi to get out of it, but rates have gone up and 4% is the best I can get.  I might still refi, but I can forsee interest rates going over 5% in the next year or two, maybe. 

Another Reader

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Re: How bad is PMI? Be honest
« Reply #23 on: January 12, 2017, 09:35:29 AM »
My concern is that with all the years you have been working, you have only accumulated $32,000 in cash savings. That says to me you are cutting things close on cash flow - either loading up your retirement savings or spending excessively. In your shoes, I would track where the money is going and what could be done to ramp up your cash savings. 

I bought with 5 percent down with no PMI about 35 years ago, but I had some additional cash savings and the Bank of Mom and Dad to back me up.  Buying new solved the maintenance problem but it took a couple of years to get the house landscaped. 

In your shoes, I would not buy a house today with PMI and I would not consider the rip-off FHA MI.  I would accumulate more cash by slashing spending.  Like cars, houses are now a payment-valued commodity.  Rising payments reduce the pool of qualified buyers.  If rates go up significantly, housing prices will stall and then fall.  Save the cash and wait for a buying opportunity.

rubybeth

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Re: How bad is PMI? Be honest
« Reply #24 on: January 12, 2017, 01:04:04 PM »
My concern is that with all the years you have been working, you have only accumulated $32,000 in cash savings. That says to me you are cutting things close on cash flow - either loading up your retirement savings or spending excessively. In your shoes, I would track where the money is going and what could be done to ramp up your cash savings. 

I bought with 5 percent down with no PMI about 35 years ago, but I had some additional cash savings and the Bank of Mom and Dad to back me up.  Buying new solved the maintenance problem but it took a couple of years to get the house landscaped. 

In your shoes, I would not buy a house today with PMI and I would not consider the rip-off FHA MI.  I would accumulate more cash by slashing spending.  Like cars, houses are now a payment-valued commodity.  Rising payments reduce the pool of qualified buyers.  If rates go up significantly, housing prices will stall and then fall.  Save the cash and wait for a buying opportunity.

Well, I think my initial post isn't meant to be a case study, so I didn't lay everything out. :/ You make it sound like we're not good savers, which just isn't the case. I have 17 years in my field, but have only been in my current job since 2009 (prior to that, I worked part time since I was in undergrad and then graduate school; I've literally been in my field since I was 17 years old). My husband only recently finished his graduate degree in May 2016, which we paid for with no loans, and he quit his job for his 9 month long internship so we lived on my income during that time. We paid off nearly $54,000 in student loans. We replaced both of our aging vehicles and purchased them outright with no loans. We took a couple nice trips after we got out of debt, but other than that, we don't splurge very much. So for the record, we've saved about $20,000 since May 2016 when my husband started his job (that's more than $2k per month, btw). And I'm estimating we'd want to have another $15-20k, which we could probably do by this fall, but the timing isn't great for moving/getting out of our lease.  And I don't feel comfortable sharing how much we have saved for retirement. ;)

And I do track everything meticulously in spreadsheets and using Mint, and have been doing that long before I found MMM.
« Last Edit: January 13, 2017, 07:58:02 AM by rubybeth »

alsoknownasDean

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Re: How bad is PMI? Be honest
« Reply #25 on: January 13, 2017, 02:58:52 AM »
I'm looking to buy later this year with about 10% down. I'll be paying LMI (upfront lump sum rolled into the mortgage here).

It's a nuisance, but I'm sure that in the amount of time I take to save the additional amount to go to 20%, prices will increase.

Is buying a $350K house/apartment with 10% down and paying $7K in LMI a worse deal than waiting until saving 20%, only to find that the price of the same place has increased to $450K?

rubybeth

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Re: How bad is PMI? Be honest
« Reply #26 on: January 13, 2017, 08:00:45 AM »
I'm looking to buy later this year with about 10% down. I'll be paying LMI (upfront lump sum rolled into the mortgage here).

It's a nuisance, but I'm sure that in the amount of time I take to save the additional amount to go to 20%, prices will increase.

Is buying a $350K house/apartment with 10% down and paying $7K in LMI a worse deal than waiting until saving 20%, only to find that the price of the same place has increased to $450K?

That's kind of how I'm feeling, too. If we found the right house for us, in a neighborhood that allowed me to continue to walk to work, I think paying a minimal amount of PMI for 3 years or less might be worth it to keep some liquidity and lock in an interest rate around 4% for 30 years, especially as we have no idea what this new administration is going to do with interest rates or the economy in general. :/

talltexan

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Re: How bad is PMI? Be honest
« Reply #27 on: January 13, 2017, 08:11:17 AM »
Gosh, if I could have a guarantee that an asset I buy now for $350,000 will sell for $450,000 in 18 months that would be amazing...it often feels like that when real estate is in a bubble.

bassman2003

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Re: How bad is PMI? Be honest
« Reply #28 on: January 13, 2017, 10:07:55 AM »
We really shopped around at lenders, and didn't pay PMI with only 5% down.  We got a 30 yr fixed loan at 3.5% that covered 80% of the cost of the house.  We then got a 2nd loan for 15% of the price of home, at 5.0% interest.  We put down 5% and seller paid closing costs, no PMI.  Worked out great.  We paid off the 5% loan quickly, now just pay our 3.5% loan (30 yr) at normal pace.  Our credit union is specifically for people in my field, so I think they consider us very low risk.  Best of luck.

neo von retorch

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Re: How bad is PMI? Be honest
« Reply #29 on: January 13, 2017, 10:43:28 AM »
Right, for comparison, $97 PMI on a $332,400 loan added just 0.35% interest to my mortgage. (Now, as I approached 78% LTV, that interest increases to 0.38%...) Of course it adds it to all of the mortgage, instead of just the 15%. 15% * 1.5% = 0.225% so it's very close, but overall a little better than the PMI I paid (which was unusually low.) So overall, it should be a better deal than PMI. (PMI is typically higher than my example, but my credit union is amazing and my credit is excellent.)

Edit: Fixed one of the numbers. TL;DR PMI is easily going to cost you 50-200% more than a good "piggyback" loan. Also - note I was doing PMI as a portion of my overall mortgage, but really it's "interest on the portion above 80%" so it's actually much higher. In my case, it was ~4% extra on the ~28k above 78% initially but PMI gets worse as you pay it off!! So in that final month that I paid $97, and only owed say... $2000 more than the 78% LTV tipping point, it was the equivalent of 58% interest! :)
« Last Edit: January 13, 2017, 12:13:27 PM by neo von retorch »

bassman2003

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Re: How bad is PMI? Be honest
« Reply #30 on: January 13, 2017, 11:53:37 AM »
We really shopped around at lenders, and didn't pay PMI with only 5% down.  We got a 30 yr fixed loan at 3.5% that covered 80% of the cost of the house.  We then got a 2nd loan for 15% of the price of home, at 5.0% interest.  We put down 5% and seller paid closing costs, no PMI.  Worked out great.  We paid off the 5% loan quickly, now just pay our 3.5% loan (30 yr) at normal pace.  Our credit union is specifically for people in my field, so I think they consider us very low risk.  Best of luck.

Very interesting.  Do you feel like the 5% interest loan kind of substituted for PMI?  In other words, did you in effect pay PMI, but it was just spelled differently?  I feel like a person that strategically pays PMI for a few years isn't doing anything too philosophically different than what you've done here. Am I wrong?  They're just using a different instrument to do it.  Thoughts?

Its an extremely small amount compared to the typical cost of a PMI.  As one other poster mentioned, the cost of PMI payment normally adds enough to make the effective interest rate of the % you borrow above the 80% of home equity to be at a rate of 10-12% (much higher than our 5%)....then obviously goes away once you get to a good LTV ratio.  In looking at it a different way, another poster mentioned that their PMI added an amount such that the percentage of their entire mortgage was close to 5%....Our effective rate for our mortgage was ~3.8%....then gradually dropped down to 3.5% as we quickly paid off the second loan.  One of the biggest hassles though can be getting rid of PMI, sometimes you have to pay hundreds of dollars for a new assessment, which we never had to do either.  Money is money, PMI's not necessarily evil in and of itself, we were just glad to not have to pay that much.

Obviously, the optimal situation is to save up 20%, then buy a house.  We were not in that situation, as my wife had just finished grad school that we predominantly cash-flowed and we were renting a 3rd floor apt; then my wife got pregnant with our twin boys, and got put on strict bed rest (no stairs)....and had to eventually have fetoscopic laser surgery on the boys at 19 weeks, about 2 weeks before moving into our new house.  We were blessed to find the deal we did as quick as we did for our crazy situation.
« Last Edit: January 13, 2017, 12:27:08 PM by bassman2003 »

BlueHouse

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Re: How bad is PMI? Be honest
« Reply #31 on: January 13, 2017, 12:22:12 PM »
Rubybeth, you may want to ask the potential lenders if they offer free recast after closing.  I recently recast my loan (I just wanted lower payments, I didn't have PMI, but it seems to be the same idea). 

A recast allows you to re-amortize your loan in the event you have some windfall of cash that you want to use as a downpayment that wasn't available at closing, for instance, more savings, sale of your previous home, etc.  My thought is that if you get the cash to get you to 20%, you can recast without having to wait for the additional 2 or 5% or whatever PMI requires to drop those payments. 

My recast with Wells Fargo was free but they required some percentage or some dollar amount in order to do it, can't remember how much, but I far exceeded what was required.  Oh, and I recast 5 years after closing.  Interest rate and loan term stay the same.  no fees.

Dicey

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Re: How bad is PMI? Be honest
« Reply #32 on: January 14, 2017, 12:34:31 AM »
I'm looking to buy later this year with about 10% down. I'll be paying LMI (upfront lump sum rolled into the mortgage here).

It's a nuisance, but I'm sure that in the amount of time I take to save the additional amount to go to 20%, prices will increase.

Is buying a $350K house/apartment with 10% down and paying $7K in LMI a worse deal than waiting until saving 20%, only to find that the price of the same place has increased to $450K?
Depends. Sometimes, housing prices go down. Oh, I see you live in the land of Oz. Hmm, maybe not. OTOH, maybe your LMI is not as expensive as the US PMI system. Sometimes, people with PMI develop such a hatred for it that they fail to work out the math to see what it's really costing them. Or they fail to realize that they're paying it due to their own impatience. In this specific case, the OP had pretty close to 20%, they just wanted to keep a big cash cushion, IIRC.

Mezzie

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Re: How bad is PMI? Be honest
« Reply #33 on: January 14, 2017, 09:13:07 AM »
We bought our house with a PMI just as the market was recovering here. Within a year (the amount of time we would have waited to save enough to avoid PMI), average house prices in our area were 50k more. Over the 5 years we had a PMI, we paid a total of 17k. I hated paying that PMI every month, but in the long run, it saved us 33k over five years or allowed us into a neighborhood that we would have been priced out of, both of which were worth it. Now houses in our neighborhood with the same floor plan are going for 150k more than what we paid.

I wish I could say this was some sort of major foresight on our part, but we just lucked out.

So... in general, I'd say PMI sucks, but in rare cases, it can be a good choice.

rubybeth

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Re: How bad is PMI? Be honest
« Reply #34 on: January 16, 2017, 03:35:48 PM »
I got some updated quotes from our potential lenders based on an actual property we saw so we could make a better comparison, and the numbers aren't too bad, in my opinion. Putting down about $25k (and asking seller to pay some closing costs) gives us an estimated PMI cost of around $19/mo for under 3 years. I think that cost would be worth it to a) lock in an interest rate around 4%, b) to keep getting dividends on our taxable investments vs. selling them, c) and if we find a house later this winter/early spring, that's better timing for just letting our lease run out instead of needing to buy ourselves out of it. Also, if we wanted to, I'm guessing we could make extra payments and get out of PMI sooner, but it might not be worth it to pay for an appraisal any earlier than 2-3 years when PMI would go away on its own. I will, of course, clarify the terms of the PMI before we make any final decisions, but this was helpful.

paddedhat

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Re: How bad is PMI? Be honest
« Reply #35 on: January 17, 2017, 07:03:13 AM »

To have enough to pay for everything in cash plus have a cushion, we won't realistically have 20% down until late 2017, like Nov/Dec, which is not a great time to shop/move in our region (Minnesota). Most people list houses in the spring, it seems, and that's also when our lease is up (April for move out at end of June).



Buying a house in Nov/Dec is a great time to buy a house (if the goal is to get a low price) because you will have very little competition. Buying a house in the spring/summer is the worst time for getting a deal because you will have a lot of competition from other buyers.


I just read an online article about how the avalanche of information available to the buyer is a contributing factor to others, like rising rates, that has a created a current climate where there is no longer any specific "buying season" in the residential market.  We shopped for an existing home in a mid-Atlantic state since early last summer. Our realtor told us that for the first eight of her ten years in the business, Traffic died by Thanksgiving, and it was often late spring until she saw a commission check. For the last two years it's been strong straight thru the winter. We found a house and signed a contract on Christmas eve, while battling several other buyers in a bidding war.

neo von retorch

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Re: How bad is PMI? Be honest
« Reply #36 on: January 17, 2017, 07:14:10 AM »
I got some updated quotes from our potential lenders based on an actual property we saw so we could make a better comparison, and the numbers aren't too bad, in my opinion. Putting down about $25k (and asking seller to pay some closing costs) gives us an estimated PMI cost of around $19/mo for under 3 years. I think that cost would be worth it to a) lock in an interest rate around 4%, b) to keep getting dividends on our taxable investments vs. selling them, c) and if we find a house later this winter/early spring, that's better timing for just letting our lease run out instead of needing to buy ourselves out of it. Also, if we wanted to, I'm guessing we could make extra payments and get out of PMI sooner, but it might not be worth it to pay for an appraisal any earlier than 2-3 years when PMI would go away on its own. I will, of course, clarify the terms of the PMI before we make any final decisions, but this was helpful.

Nice low PMI. When I refi'd to my credit union, I had PMI (with my first house, I had originally paid extra for a 5% down, no PMI loan, but the rate was 6.375%, refi'd in '09 to my CU) and it was $16/mo on a $145k loan. Assuming $150k house, $125k loan ($120k is 80%) then you're currently paying 3.84% extra (and as you approach the 80%, it goes up.) Not awful - an educated choice to spend your money that way :)

talltexan

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Re: How bad is PMI? Be honest
« Reply #37 on: January 17, 2017, 09:43:15 AM »
But does having the PMI mean you're buying more house than you really needed? If you shrank the purchase down to 5X your available cash for down payment, how much house could you still get?

Dicey

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Re: How bad is PMI? Be honest
« Reply #38 on: January 17, 2017, 11:25:05 AM »
I got some updated quotes from our potential lenders based on an actual property we saw so we could make a better comparison, and the numbers aren't too bad, in my opinion. Putting down about $25k (and asking seller to pay some closing costs) gives us an estimated PMI cost of around $19/mo for under 3 years. I think that cost would be worth it to a) lock in an interest rate around 4%, b) to keep getting dividends on our taxable investments vs. selling them, c) and if we find a house later this winter/early spring, that's better timing for just letting our lease run out instead of needing to buy ourselves out of it. Also, if we wanted to, I'm guessing we could make extra payments and get out of PMI sooner, but it might not be worth it to pay for an appraisal any earlier than 2-3 years when PMI would go away on its own. I will, of course, clarify the terms of the PMI before we make any final decisions, but this was helpful.
I have mentioned elsewhere that I used PMI to buy my first house and hated it, but was glad I bought the house. At these prices, I'd do it again. Worth considering, especially if you can cut something else out of the budget to balance the PMI. Pending clarification: Green Light.

rubybeth

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Re: How bad is PMI? Be honest
« Reply #39 on: January 17, 2017, 11:32:20 AM »
But does having the PMI mean you're buying more house than you really needed? If you shrank the purchase down to 5X your available cash for down payment, how much house could you still get?

I'm not sure I totally understand--if we couldn't buy a house that meets our needs, we aren't in such a rush to buy that we'd buy something that doesn't meet our needs. In our area, we could probably find something for $125k, but it likely wouldn't be sufficient for us to stay for the next 15-30 years or be very good in terms of resale unless we found some kind of crazy deal. There are definitely some run down ugly houses for cheap, but I'd rather keep renting than live in a house I don't like. :/

To get the type of space, amenities, location, etc. that we want in a house, we're looking at houses between $140-$150k, some a bit less than that, some maybe slightly more. We aren't looking at huge houses, or monthly payments we can't afford--we'd easily be at less than 25% of take home pay even with PMI on a house that costs $150k.

caracarn

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Re: How bad is PMI? Be honest
« Reply #40 on: January 17, 2017, 01:42:54 PM »
I've read most of the posts and skimmed the rest and just adding some points, that may be totally useless as this thread has shifted a few times.

The main item that got me to want to comment was the "if you have to pay PMI then (some random bad thing)". 

Six years ago I had to get an FHA loan that I could barely afford the 3.5% down payment on because that was all the cash I could find.  Was this because I was some ridiculous spender, or managed my finances like an idiot?  No, it was because I had just come out of a divorce, had three kids to raise basically on my own as their mom really wanted nothing to do with them and where we lived is not really a community with rentals, not could I easily find an apartment that would make sense.  Could I have sold all my furniture for pennies on the dollar to not have to consider storage fees if I went into an apartment, which made the math even worse, and then repurchase when I got the house we really needed a few months later at full furniture cost and basically have made a horrendous financial decision, or was it better to take on PMI, which I knew I could not eliminate for at least three years because of the FHA requirement we had on the loan?  I still was making a six figure income and could easily afford the payments, I was just cash poor at a time when I needed a house and making another decision would be long term foolishness.  I've since refinanced a little over a year ago and no longer have PMI, but no one would have ever said I could not afford the house we bought, so labeling the fact that you get PMI as a sign of your ability to absorb the costs is a bad measure, IMHO.

I will also, however agree, that I would not ever carry PMI if I could avoid it.  It is money flushed down the toilet, and unless you had some guaranteed return that could make you the same amount (in my case just under $190/month because I was short $36K) the PMI is a guaranteed turd of money flushed down the toilet every month.  Everyone needs to make their own decision here, including OP, but if it was me and I had the 20% would not even be a debate.  I'd put down my 20% to avoid PMI.

index

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Re: How bad is PMI? Be honest
« Reply #41 on: January 17, 2017, 03:18:00 PM »
Just figure the cost of the PMI and decide for yourself:

($PMI/month) x (12 monts) + ($Down Payment amount under 20%) x (Interest rate on the loan) = yearly cost of having less than 20% down.

for instance, for a 300k house with only 40k down (13%) financed at 4%:

$100 PMI/month x 12months + 20 k * 4% = $2000 to effectively borrow $20k = 10%

If you are ok financing your down payment at 10%, go for it. If you have crazy low PMI and it works out to be 5-7% maybe you are more comfortable. Other posters are using other means, ala financing 15% of the home cost on an additional load at 5%.

You need to decide what interest rate you are comfortable paying to finance your down payment. If you can find a scenario to make that work, then go for it. 

talltexan

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Re: How bad is PMI? Be honest
« Reply #42 on: January 18, 2017, 01:09:21 PM »
That 10% effective rate on PMI seems expensive when there are Chase slate credit cards that will give you money for a year at a 3% balance transfer fee.

Opening those credit cards may make it harder to qualify for the main mortgage, but perhaps you have one open already?

JLee

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Re: How bad is PMI? Be honest
« Reply #43 on: January 18, 2017, 01:39:04 PM »
That 10% effective rate on PMI seems expensive when there are Chase slate credit cards that will give you money for a year at a 3% balance transfer fee.

Opening those credit cards may make it harder to qualify for the main mortgage, but perhaps you have one open already?

They won't give you a cash advance for that, which is what you would need.

Dicey

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Re: How bad is PMI? Be honest
« Reply #44 on: January 18, 2017, 09:26:41 PM »
Six years ago I had to get an FHA loan that I could barely afford the 3.5% down payment on because that was all the cash I could find.  Was this because I was some ridiculous spender, or managed my finances like an idiot?  No, it was because I had just come out of a divorce, had three kids to raise basically on my own as their mom really wanted nothing to do with them and where we lived is not really a community with rentals, not could I easily find an apartment that would make sense.  Could I have sold all my furniture for pennies on the dollar to not have to consider storage fees if I went into an apartment, which made the math even worse, and then repurchase when I got the house we really needed a few months later at full furniture cost and basically have made a horrendous financial decision, or was it better to take on PMI, which I knew I could not eliminate for at least three years because of the FHA requirement we had on the loan?  I still was making a six figure income and could easily afford the payments, I was just cash poor at a time when I needed a house and making another decision would be long term foolishness.  I've since refinanced a little over a year ago and no longer have PMI, but no one would have ever said I could not afford the house we bought, so labeling the fact that you get PMI as a sign of your ability to absorb the costs is a bad measure, IMHO.

I will also, however agree, that I would not ever carry PMI if I could avoid it.  It is money flushed down the toilet, and unless you had some guaranteed return that could make you the same amount (in my case just under $190/month because I was short $36K) the PMI is a guaranteed turd of money flushed down the toilet every month.  Everyone needs to make their own decision here, including OP, but if it was me and I had the 20% would not even be a debate.  I'd put down my 20% to avoid PMI.
Caracarn, I am so glad that this strategy worked out for you! I think the two most important factors at play are 1) You did not buy more house than you could afford and 2) You understood how PMI worked before you chose to go that route.

Many, many people use PMI when they are buying a house they cannot afford, then all they do is piss and moan about how terrible PMI is. Um, no, not always, as your example clearly illustrates.

BTW - The only time I paid PMI was in the late 80's. OMG $190/month! Ouch!

rubybeth

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Re: How bad is PMI? Be honest
« Reply #45 on: January 19, 2017, 07:32:31 AM »
Just figure the cost of the PMI and decide for yourself:

($PMI/month) x (12 monts) + ($Down Payment amount under 20%) x (Interest rate on the loan) = yearly cost of having less than 20% down.

for instance, for a 300k house with only 40k down (13%) financed at 4%:

$100 PMI/month x 12months + 20 k * 4% = $2000 to effectively borrow $20k = 10%

If you are ok financing your down payment at 10%, go for it. If you have crazy low PMI and it works out to be 5-7% maybe you are more comfortable. Other posters are using other means, ala financing 15% of the home cost on an additional load at 5%.

You need to decide what interest rate you are comfortable paying to finance your down payment. If you can find a scenario to make that work, then go for it.

Okay, so we're going to look at a house that's listed at $153k. The math would be (roughly, based on what we were quoted for our rate of PMI on a house listed at $147,500):

around $21/mo for PMI x 12 months = 252 annually (until 2019, so around $756 total for three years)
putting down $25,000 instead of $30,600, so $5,600 at 4% = $224
total would be $252 plus $224 = $476

We could actually afford $30,600 if the seller will pay a portion of closing costs, we'd just be cash poor for a few months, which wouldn't be the worst thing, but wouldn't leave us with a lot of cash on hand. Maybe our housewarming gift registry can be money for any appliances that don't convey? :D

talltexan

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Re: How bad is PMI? Be honest
« Reply #46 on: January 19, 2017, 09:05:42 AM »
What you're describing here is an effective rate for PMI that is pretty close to the full-on mortgage rate. I cannot disapprove if that's truly the cost.