Getting rid of PMI (part 1): The P stands for “parasite”

Part of a series:

• Getting rid of PMI (part 1): The P stands for “parasite”
• Getting rid of PMI (part 2): The M stands for “misdirection”
• Getting rid of PMI (part 3): The I stands for “I already told you”
  
• Getting rid of PMI (part 4): Hard work vs. a risky shortcut
• Getting rid of PMI (part 5): The moment of truth?

Every month, I pay money to a group that’s actively betting I’m going to default on my mortgage.

I hate this.

I know you can say that’s “it’s just business”, and that the statistics don’t lie, but I still get infuriated with the idea that someone or someones think I will default, and are charging me money in preparation for (or defense of) it.

But I also know that there is a way to get rid of this monthly penalty/racket/protection fee, whatever you want to call it.

And I’m already started on this path.

I want to pay off my mortgage, of course. I want to become debt-free for real, and forever.

But I really really want to get rid of the mortgage parasite, otherwise known as “PMI”, or Private Mortgage Insurance.

What is PMI?

Private Mortgage Insurance (PMI), is insurance that the mortgagor takes out in order to reimburse the lender in the event that the mortgagor does not repay the loan.

That’s right, PMI is insurance you take out and you pay for, but that benefits someone else.

Do you see what I’m already hating it?

Typically, you need to take out PMI if you put down less than a 20% down payment on your home. The reason for this is that since you’ve put “so little” down relative the the value of the home, you have less (literal and figurative) investment and therefore it would make it “easier” for you to default. Since the mortgage company would be left holding the bag, that’s a risk they want to minimize.

This system has been in place for a long time, as far back as the 1950s in fact. And the 20% rule of thumb has been there since the beginning.

Why not just save 20% then?

The easiest way to remove PMI, like all parasites, is never have it in the first place: put down 20% or more.

I would have loved to have done that. I had 10%, which my closing agent said was higher than average. “Most people put down only something like 3%” she said. (Wow.)

I definitely recommend saving no less than 10% as a down payment, because if nothing else it gets you plenty of practice in affording a mortgage before you have to. But if your average home value is $400,000, there’s a big difference between saving $40,000 and saving $80,000.

It would have taken me a few years to get from 10% to 20%. And in the meantime, I would still have been paying rent. And rent makes PMI look like nothing, comparatively speaking.

So PMI it was, for better or worse.

The high cost of PMI

PMI isn’t expensive, relative to the cost of the mortgage, usually being calculated to be somewhere between 0.5-1% of the loan, paid annually. Mine’s definitely on the low end of that scale, and comes to only about 4% of my monthly bill.

Which doesn’t sound like a lot.

But then again, a parasite is small too, relative to its host. That doesn’t mean it can’t do some serious damage.

If you assume $100 a month in PMI payments, that’s $1,200 a year.

(I can’t give figures on how much PMI will run, because it is calculated through so many factors: size of mortgage, interest rate, term, credit score, phase of the moon, etc.)

Assuming a 30 year loan, a 4% rate, and a standard payment plan, it’ll take you about 10 years to get to 80% loan-to-value (or LTV, meaning that you now have paid for 20%). 10 years at $1,200 a year is $12,000!

No way. I will not pay that much for that long.

You can get rid of PMI (maybe)

I mention the 80% LTV mark because that’s where interesting things start happening. Just like how you can usually avoid PMI if you put down 20% (80% LTV), once you get to that LTV through payments, you can in many cases remove PMI from your mortgage.

The criteria for this are, unsurprisingly, byzantine. And different lenders have different criteria on when and how PMI can be removed. Some have minimum periods of time you have to own the mortgage.

Legally, a mortgage company must terminate PMI when your LTV reaches 78%, as per the Homeowner Protection Act  of 1998. But a mortgage company can terminate PMI between than 78%-80% threshold, based on request.

Yup, this is the ultimate call to lower your bill.

And it gets more complicated, because not only does the “L” in LTV change as you pay down the loan, but the “V” also changes as property values rise or fall.

Here in Portland, for example, property values are rising faster than anywhere else in the nation. (Mortgage crisis? Never heard of it.)

Which means that, most likely, my LTV is already down to the 78-80% mark without me even trying.

Which means that it might be time to give my mortgage company a call, and start to get rid of this thing that takes money away from me each month, just so a lender can feel more secure.

But that’s another story.

But enough about me. How have you handled PMI?