Private Mortgage Insurance

0:00 Ralph: Are you paying an extra, a hundred dollars or more to your mortgage company every month and not even realizing it. Well, stay tuned to find out what this sneaky expense is and how you can get rid of it. Today's episode might very well save you thousands of dollars.

0:44 Welcome back to the show. I'm excited to dive into today's topic with you. Today, we're talking about one of the sneakiest extra costs that come with some mortgages. That's private mortgage insurance. You've probably heard of called PMI. And listen, before we get started, don't forget to subscribe to the show and join our email list. You can do that at askralphpodcast.com cause you don't want to miss tomorrow's episode. When we're going to be talking about the top tech. For 2024, we're going to talk about all the cool things that are coming along in 2024, as it relates to tech. So let's get started with today's episode. If you've ever felt like you're just throwing money down the drain with your mortgage payment. PMI might very well be the culprit.

1:25 A lot of people don't know about this. 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. But here's the deal. It can add a significant monthly cost to you. The borrower. It's what is added to your mortgage payments. So let's start by breaking down. Exactly. What is PMI? Who has to pay it. And most importantly, and I can't stress this enough. How you can get rid of it. So let's dive in. Simply put. Private mortgage insurance is an insurance policy. That homeowners have to buy if they put less than 20% down on their home loan. So if you buy a new home, you buy an existing home.

2:05 If you have less than 20% down payment or 20% equity, they're going to charge you this PMI insurance. So if you put down 15% or 10% or 5%. Chances are your lender requires PMI. This extra policy protects the lender. in case you stop making payments. So if you default, they can recoup their losses through the PMI. Of course. We hope that never happens. But lenders see loans with less than 20% down as riskier. that's a truth. 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. They're going to require this insurance.

2:47 Now. On its surface. That seems very reasonable. the lenders taking risk. And they're lending you the money. They're putting out a lot of money. If you're talking about a home loan. But PMI comes at a big cost for you. The borrower. The truth is folks. It can add anywhere from a half to a full percent or more to your annual interest rate. And let's talk about an example. A $200,000 loan. That could be over $150 extra per month. That's $2,000 a year straight to the lenders pocket. It doesn't reduce your principle balance. It doesn't help you in any way. It's not insurance for you. It's insurance for the lender. So let's dive in a little deeper into PMI. The exact amount you'll pay for PMI depends on several factors, but what are those factors?

3:31 Ralph? The first one is your credit score. The higher, your score, the lower your PMI rate. I preach on this all the time. Honor your credit. It will help you in ways that you can't even think about it at the time. And it also hurt you. This is one of the places that hurt you. So those with excellent credit. Can get rates as low as a half a percent on the loan amount per year. So your PMI is based on your credit, but if you're less than stellar credit, Hey, that could add 1%. To your loan. Another thing, it varies what your PMI is, the size of your down payment. Typically the lower, the down payment, the higher, the PMI. So just putting down 5%. Can bump your rate versus let's say you put down 15%.

4:11 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. You can go back and listen to that. You can find those at askralphpodcast.com. And while I'm talking about that, you know, there's over 300 episodes out there. You can listen to. You can listen to my sparkling voice as often as you wish. But there's a lot of good content out there. So that's a decision point. if you're really trying to avoid this PMI, one of the things you might want to consider is putting more down now. It also depends on the type of mortgage. FHA loans actually require PMI for the life and alone. Well, unless you refinance it. Conventional loans.

4:51 Those are more traditional conventional loans allow removal after you have a 20% equity. Position. Now let's talk about loan term. So shorter terms like 15 years, make you build equity faster? So if your goal was to eliminate, we're going to talk about that in a few minutes, ways to get rid of PMI. A 15 year loan is going to allow you to remove that PMI faster. But of course the payments are higher. Now when shopping for a loan. Pay attention to how lenders quote the PMI rate. Sometimes they're a little sneaky about this. Some bake it into the interest rate while others quote it separately. So you got to do the math and compare apples to apples, ask the mortgage broker or the lender you're working with.

5:32 First of all, are you charging me, PMI? I and how do you calculate and how to get rid of it? So let's talk about that right now. What are some strategies to remove PMI? Here are some additional proactive strategies beyond just waiting it out. you could just wait it out. wait till you get to. I don't know what the FHA loan you're going to wait 30 years. If there's a 30 year loan. I don't recommend that. But you could just wait till you get to that 20% equity position and then ask the lender to drop it. So one way you can do that. And I talked about this in a podcast episode a week ago. And that's paying extra on your mortgage, make extra principal payments to build equity faster. Even an extra a hundred dollars per month can make a huge difference. Could help you reduce that PMI quickly and think about it.

6:13 If you're PMI is running you 150 or $200 a month. Wouldn't you rather use that money as extra principal payments? Now another option is to lower your interest rate through refinancing while keeping the same term. This drops your payment. 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. 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. That's just a question you have to ask the lender. And the other thing you want to do is take advantage of home appreciation with a cash out refinance. You can withdraw equity while eliminating PMI. These are all options that you can consider, but all these you need to discuss with your lender.

6:55 Some may waive requirements. If you have substantial equity, the key is being proactive in this. if you're paying this on a monthly basis. Don't just accept that PMI is a given. You can take steps to actively remove it and free up cashflow. The good news PMI doesn't have to last the entire length of the loan. There are some other ways to get rid of it. first of all, when you reach 20% equity in a home through your payments and appreciation. You can make a request to the lender. That this PMI. Be removed. Now. From a practical standpoint. Looking at amortization tables. Now this all depends on the market. Depends on where you are. If your house is appreciated in value, this usually happens within five to seven years.

7:35 And then what do you do? Ralph? You send the written request to the lender. And of course, you're going to have to have an appraisal. 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. Now another thing you can do. And again, this is going to depend on your specific circumstances. You could try to refinance into a new loan. 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. See, who's got the best deal out there. Now, another option, and we talked about this a little bit. You may be able to pay down the loan faster, through extra payments or lump sumps. like I said, I covered this in a podcast about two weeks ago. I would encourage you go back and listen to that.

8:16 I gave you strategies of how to do that. Because when you reach that 20% equity position, then you ask the removal, but don't overpay at the expense of other financial goals. And that's why I say you have to go back and look at that now, before we wrap up today. I want to remind all of our listeners to visit our podcast page at askralphpodcast.com. There you can leave us a review, share your thoughts, or even send us a message. there's a cool little icon down in the bottom right corner. It's a microphone. And it's basically a voicemail system. Well, you can record a message, if you've listened to our show for any time, people are doing that and I strongly encourage you to do that. Record a message to ask us a question or share something that's worked in your life. While you're there. Make sure you join up for our email list.

8:56 And why do you want to do that? Well, we're giving a $25 Amazon gift card away each week with a drawing. So I would encourage you to sign up, tell your friends and family, share our episodes with them and get them to sign up as well while you're there. If you want to schedule a consultation with me to talk about your specific circumstances. And if you listen to me, you know, I always tell people. You've got to look at your specific circumstances. I can do a great podcast and give great information from a general perspective. But you've got to look at your individual circumstances and see how it relates to you. so you can make an appointment right there. So let's talk about a little bit of a recap. Removing PMI seems like a no brainer, but here's a few things to keep in mind.

9:37 You got to make sure that your home value has appreciated enough to have 20% equity based on the appraisal. So if you're thinking about getting PMI removed, it's not going to be as simple as calling or sending the. Lender a letter. You've got to make sure that you're really at that 20% equity position. So you may have to pay a few hundred dollars to get an appraisal. Another thing you've got to look at. If you're thinking about refinancing to get rid of it, like let's say you're in that FHA loan. And I talk about FHA requires that for the life of the loan. You might want to refinance, but if the interest rate is going to increase substantially. The savings you might have from dropping that PMI might end up costing you more in interest. You also have to think. Maybe your loan has prepayment penalties or something like that.

10:19 So again, you've got to look at your individual circumstances and another thing I want to stress here. Don't drain your emergency fund, a retirement savings to remove PMI faster. That will cost you more in the long run. Listen folks. The bottom line is PMI can be an expensive extra cost, but as I've illustrated today, there are options to remove it. You've got to evaluate your situation to find the best path forward. With the right approach, you can say goodbye to wasted money and put those savings towards more productive uses. That's just another way. You can honor God through wise stewardship. That wraps up our overview of private mortgage insurance, what it is, who pays it And how you may be able to remove it. 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.

11:06 To help you master your finances from a Christian perspective. And that's what we talked about here. Stewardship. Faith. And balancing those things. Stay tuned for our next episode until next time, as I always say, stay financially savvy and God bless you. Abundantly.