August 7, 2023 • 12 mins
Ever wondered why you're shelling out for private mortgage insurance (PMI) that seems to only protect the lender? Fear not, finance novices and seasoned homeowners alike, we're putting PMI under the microscope in this episode, and you may be surprised at what we uncover. Join your host, Jeff Smith, as he dives into the ins and outs of PMI and the factors affecting its cost. He'll also shed light on the competitive landscape of PMI providers and how technology has led to a decrease in PMI costs, ultimately benefiting borrowers like you.
But wait, there's more! Jeff is also challenging the conventional wisdom that PMI is an unnecessary cost to avoid. Could paying PMI and entering the housing market sooner actually be a smarter financial decision, especially for first-time homebuyers? Tune in to discover a fresh perspective that could redefine your approach to home buying. And remember, your support can make a huge difference - sharing this podcast, leaving a five-star review, or reaching out with questions. So, here's to turning fear into knowledge and making smarter financial decisions together! Let's uncover the truth about PMI on 'Fairways and Finance'.
Important Links & Info:
Follow Jeff:
Instagram: https://www.instagram.com/jeffsmithaz/
Facebook: https://www.facebook.com/profile.php?id=100002927397116
LinkedIn: https://www.linkedin.com/in/jeff-smith-40627016/
Jeff Smith - Tiger Home Loans
📲 480.909.4000
📩 jeff@tigerhomeloans.com
🔗 www.tigerhomeloans.com
Equal Housing Opportunity
Tiger Home Loans NMLS: 2425582 NMLS: 413643
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Jeff (00:04):
Welcome to the show fairways and finance.
My name is Jeff Smith.
I've been in the mortgagebusiness for 16 years top
quarter percent LL nationwide.
And you know this podcast.
We want to talk about yourfinances, how to grow and
accumulate wealth and all thingsrelated to the mortgage
industry.
But we're golf lovers here aswell, so we're going to work in
some golf.
Don't worry for my golf loversout there.
(00:26):
We got you and I hope you enjoythe show.
Okay, welcome back to the show.
Everybody, fairways and finance.
I'm your host, jeff Smith,excited to talk to you today
about the mortgage industry.
And today we're going to talk alittle bit about private
mortgage insurance, pmi.
(00:47):
That's kind of one of thosenaughty words that you hear when
you're thinking about a homepurchase.
People will tell you don't payPMI, pmi is bad.
Watch out for PMI, and I wantto dispel some myths surrounding
PMI.
Want to tell you what it is andthen just give you the
information to decide.
(01:07):
You know if that's somethingthat you're willing or not
willing to pay and give you someinformation as to you know when
people pay it and when theydon't.
So PMI stands for privatemortgage insurance.
It's sometimes referred to asmortgage insurance for short.
So PMI is an insurance coveragethat protects the lender in
(01:28):
case you were to go into defaulton the mortgage.
So you have your loan, youreach tough times and you're
unable to make your payments andthe lender forecloses on you.
Whatever their losses are, thePMI is going to cover some or
all of those losses for thelender.
So it's an insurance on theperformance of the loan.
(01:50):
So it's not any any type ofinsurance that benefits you as
the buyer.
So that inherently makes itsomething that you don't want to
pay because it's not doing anybenefit for you and you're the
one paying for it.
Pmi is provided by one of sixcarriers that offer private
mortgage insurance across thecountry.
(02:10):
As a mortgage company or as amortgage broker, when we set up
an application for someone,we're just going to run the cost
of PMI for all those majorcarriers.
We're going to run the cost ofPMI for all of those major
carriers and then select the onethat is the lowest cost because
(02:30):
it does no benefit for thebuyer, so we just want to pick
the one that has the absolutelowest cost.
Now that has led to aninteresting situation in the PMI
landscape, because there'sreally no differentiator between
the different private mortgageinsurance companies and there's
no features or benefits orcustomer service or anything
that comes into play as to why aconsumer would want their PMI
(02:54):
with one private mortgageinsurance company over the other
.
I mean there could be in somecases for certain lenders a
little bit better servicebetween the lender and the PMI
company, but that doesn'tinvolve the borrower and the
borrower is the one paying thePMI.
So from a consumer perspectiveit really makes no difference
who the PMI company is, becauseit's not a policy that's
(03:17):
protecting you, it's protectingthe lender.
So we want to get you the leastexpensive policy that's
available.
Pmi has come down significantlyin cost over the last five years
.
Because of that reason there'sjust basically a pricing war
with the private mortgageinsurance companies.
(03:37):
With technology it's easier forlenders to run the cost for
every private mortgage insurancecompany with the click of one
button.
So because it's become easierto run that data, lenders are
consistently selecting thecompany that has the cheapest
premium.
So that has brought prices downsignificantly.
(03:57):
So PMI doesn't cost nearly asmuch as it used to, especially
if you have a good credit score.
So on a two or $300,000 loan,if you're putting 10 or 15% down
, you could have PMI.
That is less than $50 a month,so it's not a huge expense, and
(04:19):
that's assuming that you havegood credit.
And I actually just ran a quotesimilar to that for a client
this morning and it came in at$42 a month.
So the PMI is required to bepaid anytime you put less than
20% down and the cost of it istiered based on your credit
score, based on the occupancy ofthe transaction, whether it's
(04:40):
primary residence, second home,investment property, based on
the type of loan that you'regetting, if it's conventional,
if it's a 30-year fixed, if it'sFHA, and so the tiers on
conventional loans is everyincrements of every 5% of down
payment.
So if you're a first-time homebuyer, you do the minimum down
(05:00):
payment of 3%.
That's the least, the mostexpensive tier for PMI, unless
you fall within some incomelimits 80% of the area median
income, which in Maricopa Countyis about $80,000.
Now, if you're under that, thenyou because you're a first-time
home buyer and you're under 80%area median income, you
actually get a reduced cost onthe PMI.
(05:22):
But then everybody else is inthe higher tier there.
With 3% down, then it becomes alittle less expensive with 5%
down, a little bit lessexpensive with 10% down and then
a little bit more lessexpensive with 15% down.
It is not required if you put20% down or more on a
conventional loan.
So that's how the tiering andthe pricing works.
(05:44):
And then credit score is reallythe biggest factor that
determines the cost of PMI.
If your credit score starts toslip under 760, 740, 720, 700,
that cost will ratchet up, andit starts to ratchet up fairly
quickly, depending on what yourincome level is.
So that is something to beaware of.
(06:05):
That is sometimes where we cansee PMI become a lot more
expensive and become somethingthat you really want to avoid.
But oftentimes I see the peoplewho are in that situation who
don't have as good of a creditscore.
They also don't have as muchmoney to put down.
The reason that they don't havea great credit score is because
they don't have a lot of extraincome, they don't have a lot of
(06:27):
reserves, and so that's whythey're missing bills and
missing payments.
So for that person to put 20%down can sometimes be really
difficult to do.
So I think that it's importantto look at the cost of the PMI
in percentage terms for one,because that's how it's
calculated as a percentage ofthe loan amount.
So if you have an excellentcredit score, you have a lot of
(06:48):
situations.
Your PMI is between 0.1 and 0.3%.
So if you have an interest rateof 6.5, and now it's 6.8,
that's effectively the cost ofPMI.
So it's not like a backbreakerin terms of cost.
And if you think about it,sometimes people say, oh well,
(07:10):
you shouldn't buy a home unlessyou had 20% down.
Okay, it's going to cost you0.3% to have the PMI.
Let's say 0.3% is almostnothing when compared to how
much that home could go up invalue and how much you could
make in return by being in thereal estate market and earning
(07:30):
equity by owning a home.
Let's say you own a home and thevalue of that home is going up
5% year over year.
Well, you're losing.3 to thecost of the PMI.
So you're netting 4.7% inreturn year over year by buying
a home with PMI, instead of notbuying it and waiting until you
have 20% down, which then, bythe way, by the time you hit
(07:53):
that point, could be four orfive years down the road.
And now the cost of that homehas gone up 20 or 30%, all while
you're waiting to try andsave.3% in the cost of PMI.
So to me it doesn't make.
You know, if you have the moneyto put 20% down, absolutely I
recommend putting 20% down.
Don't pay the PMI.
If you don't have the 20% down,I recommend paying PMI and
(08:17):
getting into the market insteadof waiting and to not pay PMI.
So then, the other thing toconsider with that as well is
that when you're in the marketnow you are taking you're
participating in theappreciation of your home's
value.
Okay, so let's say that you owna home that's, you know, worth
(08:37):
$400,000 and it's going up 5% ayear.
That's 20,000 a year.
You have that home for fiveyears.
You gain a hundred thousand inequity in that home.
Now you have the equity torefinance and get out of the PMI
, or you have the equity to sellthat home and then take that
money and make a down payment onthe next home and put at least
20% down and avoid PMI.
(08:59):
So I think that sometimes itmakes a lot of sense for that
first purchase to pay the PMI.
It's like your stepping stoneto get to the next home without
paying PMI, even if you'reunable to save that cash on your
own.
If you're just in the marketand you're participating in the
equity appreciation, then that20% down payment accumulates on
(09:21):
its own for that next homepurchase.
Lastly, as the tax lawscurrently stand, pmi is tax
deductible.
So if you itemize your taxes,you can write off a percentage
of that PMI, which furtherreduces the cost.
So PMI not all bad.
I definitely have no problemwith people paying PMI to get
into the real estate marketbecause there's so much
(09:44):
opportunity to accumulate wealthonce you're in the real estate
market.
So that's PMI.
On conventional loans, fha loansit's just a flat percentage.
This is 0.55% if you're puttingthree and a half percent down
on a 30-year fixed rate mortgageand it's a flat amount
regardless of credit score.
So that's where a lot of timeswe'll see you know, somebody's
(10:04):
got a credit score that's under720 and the cost of the PMI is
really expensive on on could ona conventional loan.
It may be less expensive forthem to finance an FHA loan
because it's a flat 0.55%.
So even an FHA at 0.55%, to meit makes a lot more sense to buy
a home and pay an extra 0.55%per year to then be earning
(10:29):
three or four or five percentreturn on the appreciation of
your home's value year over year.
Yeah, it's 0.55% less than itwould have been if you put 20%
down, but at least you're in themarket.
Now you're earning three and ahalf or four percent instead of
zero percent by continuing torent.
Va loans do not have PMI, andthen some jumbo loans have PMI
(10:51):
if you put less than 20% down.
There's some programs where youcan avoid the PMI if you put
20% down.
So so private mortgageinsurance, yeah, is it's
something that you want to avoidpaying if you have the means to
do so?
If you don't, it is not abackbreaker.
The numbers pencil out all daylong for it to make sense to pay
the PMI to get yourself intothe real estate market.
(11:14):
So I recommend doing it, andthen on your second home
purchase, you're gonna haveaccumulated enough wealth you
can probably avoid the PMIaltogether.
Dm me, shoot me any questionsyou have on that.
Would love to address it withyou.
Hope you're doing well.
Hey guys, thanks for listening.
I hope you enjoyed the show andgot some valuable information
(11:34):
out of it.
I want to help to educateothers and help people grow
their business and build wealth,and I can only do that with
referrals and your help gettingthe word out about this podcast.
So if you come across someoneyou think of benefit from this,
please share it with them and ifthere's nobody who comes to
mind, a five-star review go along way in helping me to grow
this podcast and grow the brand.
So appreciate your support.
Welcome to the show fairways and finance.
My name is Jeff Smith.
I've been in the mortgagebusiness for 16 years top
quarter percent LL nationwide.
And you know this podcast.
We want to talk about yourfinances, how to grow and
accumulate wealth and all thingsrelated to the mortgage
industry.
But we're golf lovers here aswell, so we're going to work in
some golf.
Don't worry for my golf loversout there.
(00:26):
We got you and I hope you enjoythe show.
Okay, welcome back to the show.
Everybody, fairways and finance.
I'm your host, jeff Smith,excited to talk to you today
about the mortgage industry.
And today we're going to talk alittle bit about private
mortgage insurance, pmi.
(00:47):
That's kind of one of thosenaughty words that you hear when
you're thinking about a homepurchase.
People will tell you don't payPMI, pmi is bad.
Watch out for PMI, and I wantto dispel some myths surrounding
PMI.
Want to tell you what it is andthen just give you the
information to decide.
(01:07):
You know if that's somethingthat you're willing or not
willing to pay and give you someinformation as to you know when
people pay it and when theydon't.
So PMI stands for privatemortgage insurance.
It's sometimes referred to asmortgage insurance for short.
So PMI is an insurance coveragethat protects the lender in
(01:28):
case you were to go into defaulton the mortgage.
So you have your loan, youreach tough times and you're
unable to make your payments andthe lender forecloses on you.
Whatever their losses are, thePMI is going to cover some or
all of those losses for thelender.
So it's an insurance on theperformance of the loan.
(01:50):
So it's not any any type ofinsurance that benefits you as
the buyer.
So that inherently makes itsomething that you don't want to
pay because it's not doing anybenefit for you and you're the
one paying for it.
Pmi is provided by one of sixcarriers that offer private
mortgage insurance across thecountry.
(02:10):
As a mortgage company or as amortgage broker, when we set up
an application for someone,we're just going to run the cost
of PMI for all those majorcarriers.
We're going to run the cost ofPMI for all of those major
carriers and then select the onethat is the lowest cost because
(02:30):
it does no benefit for thebuyer, so we just want to pick
the one that has the absolutelowest cost.
Now that has led to aninteresting situation in the PMI
landscape, because there'sreally no differentiator between
the different private mortgageinsurance companies and there's
no features or benefits orcustomer service or anything
that comes into play as to why aconsumer would want their PMI
(02:54):
with one private mortgageinsurance company over the other
.
I mean there could be in somecases for certain lenders a
little bit better servicebetween the lender and the PMI
company, but that doesn'tinvolve the borrower and the
borrower is the one paying thePMI.
So from a consumer perspectiveit really makes no difference
who the PMI company is, becauseit's not a policy that's
(03:17):
protecting you, it's protectingthe lender.
So we want to get you the leastexpensive policy that's
available.
Pmi has come down significantlyin cost over the last five years
.
Because of that reason there'sjust basically a pricing war
with the private mortgageinsurance companies.
(03:37):
With technology it's easier forlenders to run the cost for
every private mortgage insurancecompany with the click of one
button.
So because it's become easierto run that data, lenders are
consistently selecting thecompany that has the cheapest
premium.
So that has brought prices downsignificantly.
(03:57):
So PMI doesn't cost nearly asmuch as it used to, especially
if you have a good credit score.
So on a two or $300,000 loan,if you're putting 10 or 15% down
, you could have PMI.
That is less than $50 a month,so it's not a huge expense, and
(04:19):
that's assuming that you havegood credit.
And I actually just ran a quotesimilar to that for a client
this morning and it came in at$42 a month.
So the PMI is required to bepaid anytime you put less than
20% down and the cost of it istiered based on your credit
score, based on the occupancy ofthe transaction, whether it's
(04:40):
primary residence, second home,investment property, based on
the type of loan that you'regetting, if it's conventional,
if it's a 30-year fixed, if it'sFHA, and so the tiers on
conventional loans is everyincrements of every 5% of down
payment.
So if you're a first-time homebuyer, you do the minimum down
(05:00):
payment of 3%.
That's the least, the mostexpensive tier for PMI, unless
you fall within some incomelimits 80% of the area median
income, which in Maricopa Countyis about $80,000.
Now, if you're under that, thenyou because you're a first-time
home buyer and you're under 80%area median income, you
actually get a reduced cost onthe PMI.
(05:22):
But then everybody else is inthe higher tier there.
With 3% down, then it becomes alittle less expensive with 5%
down, a little bit lessexpensive with 10% down and then
a little bit more lessexpensive with 15% down.
It is not required if you put20% down or more on a
conventional loan.
So that's how the tiering andthe pricing works.
(05:44):
And then credit score is reallythe biggest factor that
determines the cost of PMI.
If your credit score starts toslip under 760, 740, 720, 700,
that cost will ratchet up, andit starts to ratchet up fairly
quickly, depending on what yourincome level is.
So that is something to beaware of.
(06:05):
That is sometimes where we cansee PMI become a lot more
expensive and become somethingthat you really want to avoid.
But oftentimes I see the peoplewho are in that situation who
don't have as good of a creditscore.
They also don't have as muchmoney to put down.
The reason that they don't havea great credit score is because
they don't have a lot of extraincome, they don't have a lot of
(06:27):
reserves, and so that's whythey're missing bills and
missing payments.
So for that person to put 20%down can sometimes be really
difficult to do.
So I think that it's importantto look at the cost of the PMI
in percentage terms for one,because that's how it's
calculated as a percentage ofthe loan amount.
So if you have an excellentcredit score, you have a lot of
(06:48):
situations.
Your PMI is between 0.1 and 0.3%.
So if you have an interest rateof 6.5, and now it's 6.8,
that's effectively the cost ofPMI.
So it's not like a backbreakerin terms of cost.
And if you think about it,sometimes people say, oh well,
(07:10):
you shouldn't buy a home unlessyou had 20% down.
Okay, it's going to cost you0.3% to have the PMI.
Let's say 0.3% is almostnothing when compared to how
much that home could go up invalue and how much you could
make in return by being in thereal estate market and earning
(07:30):
equity by owning a home.
Let's say you own a home and thevalue of that home is going up
5% year over year.
Well, you're losing.3 to thecost of the PMI.
So you're netting 4.7% inreturn year over year by buying
a home with PMI, instead of notbuying it and waiting until you
have 20% down, which then, bythe way, by the time you hit
(07:53):
that point, could be four orfive years down the road.
And now the cost of that homehas gone up 20 or 30%, all while
you're waiting to try andsave.3% in the cost of PMI.
So to me it doesn't make.
You know, if you have the moneyto put 20% down, absolutely I
recommend putting 20% down.
Don't pay the PMI.
If you don't have the 20% down,I recommend paying PMI and
(08:17):
getting into the market insteadof waiting and to not pay PMI.
So then, the other thing toconsider with that as well is
that when you're in the marketnow you are taking you're
participating in theappreciation of your home's
value.
Okay, so let's say that you owna home that's, you know, worth
(08:37):
$400,000 and it's going up 5% ayear.
That's 20,000 a year.
You have that home for fiveyears.
You gain a hundred thousand inequity in that home.
Now you have the equity torefinance and get out of the PMI
, or you have the equity to sellthat home and then take that
money and make a down payment onthe next home and put at least
20% down and avoid PMI.
(08:59):
So I think that sometimes itmakes a lot of sense for that
first purchase to pay the PMI.
It's like your stepping stoneto get to the next home without
paying PMI, even if you'reunable to save that cash on your
own.
If you're just in the marketand you're participating in the
equity appreciation, then that20% down payment accumulates on
(09:21):
its own for that next homepurchase.
Lastly, as the tax lawscurrently stand, pmi is tax
deductible.
So if you itemize your taxes,you can write off a percentage
of that PMI, which furtherreduces the cost.
So PMI not all bad.
I definitely have no problemwith people paying PMI to get
into the real estate marketbecause there's so much
(09:44):
opportunity to accumulate wealthonce you're in the real estate
market.
So that's PMI.
On conventional loans, fha loansit's just a flat percentage.
This is 0.55% if you're puttingthree and a half percent down
on a 30-year fixed rate mortgageand it's a flat amount
regardless of credit score.
So that's where a lot of timeswe'll see you know, somebody's
(10:04):
got a credit score that's under720 and the cost of the PMI is
really expensive on on could ona conventional loan.
It may be less expensive forthem to finance an FHA loan
because it's a flat 0.55%.
So even an FHA at 0.55%, to meit makes a lot more sense to buy
a home and pay an extra 0.55%per year to then be earning
(10:29):
three or four or five percentreturn on the appreciation of
your home's value year over year.
Yeah, it's 0.55% less than itwould have been if you put 20%
down, but at least you're in themarket.
Now you're earning three and ahalf or four percent instead of
zero percent by continuing torent.
Va loans do not have PMI, andthen some jumbo loans have PMI
(10:51):
if you put less than 20% down.
There's some programs where youcan avoid the PMI if you put
20% down.
So so private mortgageinsurance, yeah, is it's
something that you want to avoidpaying if you have the means to
do so?
If you don't, it is not abackbreaker.
The numbers pencil out all daylong for it to make sense to pay
the PMI to get yourself intothe real estate market.
(11:14):
So I recommend doing it, andthen on your second home
purchase, you're gonna haveaccumulated enough wealth you
can probably avoid the PMIaltogether.
Dm me, shoot me any questionsyou have on that.
Would love to address it withyou.
Hope you're doing well.
Hey guys, thanks for listening.
I hope you enjoyed the show andgot some valuable information
(11:34):
out of it.
I want to help to educateothers and help people grow
their business and build wealth,and I can only do that with
referrals and your help gettingthe word out about this podcast.
So if you come across someoneyou think of benefit from this,
please share it with them and ifthere's nobody who comes to
mind, a five-star review go along way in helping me to grow
this podcast and grow the brand.
So appreciate your support.
Popular Podcasts
Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.