Information contributed by Genworth Financial
If you’re thinking about buying a house, it’s important to understand all the costs that are associated with paying for a home. In addition to paying the mortgage, you’ll also have to pay property taxes, buy homeowner’s insurance, and if you don’t have a 20% down payment, you’ll need private mortgage insurance, or PMI.
What is PMI?
When you buy a house, you either need to put 20% down (meaning you pay for 20% of the value of the home up front) or pay for private mortgage insurance. This insurance allows you to get into a home without the 20% down payment. If you want to buy a home without a huge down payment, PMI is one of your options. Banks are more willing to lend to a potential home buyer with PMI because home buying transactions are smarter and safer with mortgage insurance.
PMI serves functions for both the bank and the home owner. It protects the bank in case the home owner can’t pay their mortgage and the bank has to repossess the house. It can also protect the consumer in the form of services such as job loss protection and homeowner assistance.
The nice thing about PMI is that it can be cancelled as soon as you get 20% equity in your home. For example, if put 5% down on a $100,000 home, you will take out a mortgage for $95,000. You will also pay PMI every month until the amount of your loan is 80% or less than the value of the home. You can hit the 80% mark by paying down the principle of the loan, or by having the value of your home increase. No matter how you get there, you can cancel PMI as soon as you hit that magic 80% number and start saving money.
Getting the Right Information
Before you make any big decision it is best to do some research, and since buying a house is one of the biggest decisions of most people’s lives, it’s even more important to know what you are getting into. Understanding international mortgage trends will give you a better idea of the housing market in your country, as well as around the world. The more information you have, the better you will be able to time your purchase just right and ensure you get the house you want at the price you want.
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
Smarter and safer only for the bank! If you cant pay your mortgage, then some insurance company basically pays it for you (to the bank who holds your mortgage) and the bank STILL forecloses on your house. But heres the kicker, you have to pay the PMI premium the bank doesn’t pay it, so its not protecting you at all, just the bank. Having PMI is alot like buying a life insurance policy aganist someone else’s life, and then when that person dies, the policy is paid to his family, not you. But you are the sucker paying the premium.
I have said it many times before (sometimes on this site), but here it is again: A home is NOT an investment. Only buy because you really want to live there (there are many good reasons to buy, but how much you can lowball the sucker selling it should not be one of them).
if you buy one, do yourself a huge favor and put the 20% down, do not pay those blood sucking PMI companies a dime. If you can’t afford the 20%, you cant afford the house. Likewise, if you can’t afford to take a 50% reduction in your current paycheck (representing a job loss and you taking a job at the mall to make ends meet) and still pay the mortgage, you can’t afford the house.
I used to pay $112 a month to “insure” my mortgage. Never again will I bet aganist myself in such a way (or buy things I can’t afford for that matter).
Oh, and Thousandaire is right, it can be canceled once you hit that magic 80% mark, but its not automatic, you have to call and make them do it, and they will most likely not take your word for it, you will need an appraisal, which will cost you a few hundred bucks.
Here’s what I don’t understand (and I genuinely don’t understand this — I’m not being sarcastic. If you have any answers, please let me know).
So all these people bought subprime mortgages for 0 percent down, or whatever. Presumably, they all had to get PMI. Wouldn’t that insurance have kicked in when the subprime borrowers defaulted? Why didn’t the insurers pay the banks?
Great question. I think PMI only covers 20% of the value of the home, so for those homes that lost 50% of value, the bank took a bigger hit.
Also, lots of people choose to do two loans (one for 80% and another for 20% at a higher interest rate) which gives the bank 100% exposure.
It’s also important to understand that it’s not the sheer volume of foreclosures that caused the entire mess. In fact, even in the worst state (Nevada) the foreclosure rate is below 1%. http://www.cnbc.com/id/29655038/States_With_the_Highest_Foreclosure_Rates?slide=11
The problem was the loss of confidence in AAA investments (bundled mortgages) that people realized were really crap. That was the ripple effect that had the biggest impact.
At least that’s what I think. I could be dead wrong.
Oh, that totally makes sense: if the insurance covers 20 percent (and why would it cover more? Only people with less-than-20-percent equity use it), and the price of a home drops 50 percent, than the PMI is moot. Ahhh, I see. Thanks for that explanation — that answers a question I’ve long been wondering.
Well, I would think the insurance company would still be on the hook for their 20%. But they wouldn’t be on the hook for 50%.
Also, I don’t know if AIG is in the PMI business, but if they are, that could be one explanation… They got the biggest bailout of any company!
Given how hard it is to get a mortgage these days, maybe I should launch a PMI business …