Private Mortgage Insurance

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Ralph: Are you paying an extra, a hundred dollars or more to your mortgage company every month and not even realizing it.

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Well, stay tuned to find out what this sneaky expense is and how you can get rid of it.

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Today's episode might very well save you thousands of dollars.

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Welcome back to the show.

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I'm excited to dive into today's topic with you.

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Today, we're talking about one of the sneakiest extra costs that come with some mortgages.

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That's private mortgage insurance.

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You've probably heard of called PMI.

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And listen, before we get started, don't forget to subscribe to the show and join our email list.

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You can do that at askralphpodcast.com cause you don't want to miss tomorrow's episode.

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For 2024, we're going to talk about all the cool things that are coming along in 2024, as it relates to tech.

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So let's get started with today's episode.

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If you've ever felt like you're just throwing money down the drain with your mortgage payment.

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PMI might very well be the culprit.

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A lot of people don't know about this.

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Essentially PMI protects the lender in case you stop making payments, you know, if you quit making payments that PMI insurance is going to kick in.

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But here's the deal.

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It can add a significant monthly cost to you.

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The borrower.

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It's what is added to your mortgage payments.

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So let's start by breaking down.

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Exactly.

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What is PMI?

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Who has to pay it.

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And most importantly, and I can't stress this enough.

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How you can get rid of it.

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So let's dive in.

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Simply put.

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Private mortgage insurance is an insurance policy.

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That homeowners have to buy if they put less than 20% down on their home loan.

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So if you buy a new home, you buy an existing home.

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If you have less than 20% down payment or 20% equity, they're going to charge you this PMI insurance.

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So if you put down 15% or 10% or 5%.

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Chances are your lender requires PMI.

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This extra policy protects the lender.

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in case you stop making payments.

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So if you default, they can recoup their losses through the PMI.

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Of course.

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We hope that never happens.

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But lenders see loans with less than 20% down as riskier.

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that's a truth.

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If they think that you are not, if there's not enough equity in your home equity, meaning, the value of your home minus the mortgage balance.

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They're going to require this insurance.

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Now.

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On its surface.

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That seems very reasonable.

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the lenders taking risk.

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And they're lending you the money.

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They're putting out a lot of money.

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If you're talking about a home loan.

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But PMI comes at a big cost for you.

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The borrower.

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The truth is folks.

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It can add anywhere from a half to a full percent or more to your annual interest rate.

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And let's talk about an example.

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A $200,000 loan.

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That could be over $150 extra per month.

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That's $2,000 a year straight to the lenders pocket.

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It doesn't reduce your principle balance.

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It doesn't help you in any way.

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It's not insurance for you.

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It's insurance for the lender.

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So let's dive in a little deeper into PMI.

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The exact amount you'll pay for PMI depends on several factors, but what are those factors?

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Ralph?

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The first one is your credit score.

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The higher, your score, the lower your PMI rate.

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I preach on this all the time.

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Honor your credit.

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It will help you in ways that you can't even think about it at the time.

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And it also hurt you.

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This is one of the places that hurt you.

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So those with excellent credit.

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Can get rates as low as a half a percent on the loan amount per year.

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So your PMI is based on your credit, but if you're less than stellar credit, Hey, that could add 1%.

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To your loan.

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Another thing, it varies what your PMI is, the size of your down payment.

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Typically the lower, the down payment, the higher, the PMI.

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So just putting down 5%.

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Can bump your rate versus let's say you put down 15%.

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So if you have an option of deciding at the front end, Do I put more down and we've talked about this in a podcast episode a couple of weeks ago.

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You can go back and listen to that.

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You can find those at askralphpodcast.com.

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And while I'm talking about that, you know, there's over 300 episodes out there.

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You can listen to.

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You can listen to my sparkling voice as often as you wish.

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But there's a lot of good content out there.

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So that's a decision point.

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if you're really trying to avoid this PMI, one of the things you might want to consider is putting more down now.

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It also depends on the type of mortgage.

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FHA loans actually require PMI for the life and alone.

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Well, unless you refinance it.

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Conventional loans.

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Those are more traditional conventional loans allow removal after you have a 20% equity.

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Position.

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Now let's talk about loan term.

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So shorter terms like 15 years, make you build equity faster?

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So if your goal was to eliminate, we're going to talk about that in a few minutes, ways to get rid of PMI.

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A 15 year loan is going to allow you to remove that PMI faster.

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But of course the payments are higher.

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Now when shopping for a loan.

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Pay attention to how lenders quote the PMI rate.

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Sometimes they're a little sneaky about this.

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Some bake it into the interest rate while others quote it separately.

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So you got to do the math and compare apples to apples, ask the mortgage broker or the lender you're working with.

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First of all, are you charging me, PMI?

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I and how do you calculate and how to get rid of it?

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So let's talk about that right now.

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What are some strategies to remove PMI?

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Here are some additional proactive strategies beyond just waiting it out.

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you could just wait it out.

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wait till you get to.

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I don't know what the FHA loan you're going to wait 30 years.

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If there's a 30 year loan.

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I don't recommend that.

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But you could just wait till you get to that 20% equity position and then ask the lender to drop it.

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So one way you can do that.

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And I talked about this in a podcast episode a week ago.

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And that's paying extra on your mortgage, make extra principal payments to build equity faster.

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Even an extra a hundred dollars per month can make a huge difference.

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Could help you reduce that PMI quickly and think about it.

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If you're PMI is running you 150 or $200 a month.

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Wouldn't you rather use that money as extra principal payments?

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Now another option is to lower your interest rate through refinancing while keeping the same term.

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This drops your payment.

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So more goes to principle now right now is not a great time to do that depending upon, your mortgage interest rate, because mortgage interest rates are a little bit higher now.

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The next thing you want to do is see if lender credits at closing can cover appraise on closing costs of refinancing solely for PMI removal.

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That's just a question you have to ask the lender.

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And the other thing you want to do is take advantage of home appreciation with a cash out refinance.

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You can withdraw equity while eliminating PMI.

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These are all options that you can consider, but all these you need to discuss with your lender.

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Some may waive requirements.

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If you have substantial equity, the key is being proactive in this.

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if you're paying this on a monthly basis.

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Don't just accept that PMI is a given.

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You can take steps to actively remove it and free up cashflow.

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The good news PMI doesn't have to last the entire length of the loan.

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There are some other ways to get rid of it.

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first of all, when you reach 20% equity in a home through your payments and appreciation.

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You can make a request to the lender.

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That this PMI.

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Be removed.

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Now.

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From a practical standpoint.

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Looking at amortization tables.

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Now this all depends on the market.

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Depends on where you are.

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If your house is appreciated in value, this usually happens within five to seven years.

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And then what do you do?

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Ralph?

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You send the written request to the lender.

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And of course, you're going to have to have an appraisal.

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So it's going to cost you a few bucks, see if that house will appraise so that you're at that, at least 20% equity position.

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Now another thing you can do.

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And again, this is going to depend on your specific circumstances.

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You could try to refinance into a new loan.

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If you can qualify for good terms, that don't require PMI, it can be removed, but again, you have to shop around for quotes.

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See, who's got the best deal out there.

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Now, another option, and we talked about this a little bit.

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You may be able to pay down the loan faster, through extra payments or lump sumps.

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like I said, I covered this in a podcast about two weeks ago.

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I would encourage you go back and listen to that.

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I gave you strategies of how to do that.

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Because when you reach that 20% equity position, then you ask the removal, but don't overpay at the expense of other financial goals.

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And that's why I say you have to go back and look at that

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now, before we wrap up today.

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I want to remind all of our listeners to visit our podcast page at askralphpodcast.com.

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If you want to schedule a consultation with me to talk about your specific circumstances.

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And if you listen to me, you know, I always tell people.

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You've got to look at your specific circumstances.

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I can do a great podcast and give great information from a general perspective.

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But you've got to look at your individual circumstances and see how it relates to you.

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so you can make an appointment right there.

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So let's talk about a little bit of a recap.

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Removing PMI seems like a no brainer, but here's a few things to keep in mind.

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You got to make sure that your home value has appreciated enough to have 20% equity based on the appraisal.

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So if you're thinking about getting PMI removed, it's not going to be as simple as calling or sending the.

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Lender a letter.

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You've got to make sure that you're really at that 20% equity position.

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So you may have to pay a few hundred dollars to get an appraisal.

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Another thing you've got to look at.

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If you're thinking about refinancing to get rid of it, like let's say you're in that FHA loan.

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And I talk about FHA requires that for the life of the loan.

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You might want to refinance, but if the interest rate is going to increase substantially.

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The savings you might have from dropping that PMI might end up costing you more in interest.

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You also have to think.

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Maybe your loan has prepayment penalties or something like that.

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So again, you've got to look at your individual circumstances and another thing I want to stress here.

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Don't drain your emergency fund, a retirement savings to remove PMI faster.

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That will cost you more in the long run.

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Listen folks.

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The bottom line is PMI can be an expensive extra cost, but as I've illustrated today, there are options to remove it.

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You've got to evaluate your situation to find the best path forward.

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With the right approach, you can say goodbye to wasted money and put those savings towards more productive uses.

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That's just another way.

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You can honor God through wise stewardship.

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That wraps up our overview of private mortgage insurance, what it is, who pays it And how you may be able to remove it.

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My hope is that you now understand this common, extra mortgage expense and can evaluate if it applies to your situation again, visit the askralphpodcast.com to find other resources.

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To help you master your finances from a Christian perspective.

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And that's what we talked about here.

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Stewardship.

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Faith.

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And balancing those things.

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Stay tuned for our next episode until next time, as I always say, stay financially savvy and God bless you.

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Abundantly.