Ep 216 – PMI Is Still A Privilege And Still Not The Devil 

 February 28, 2024

How to Buy a Home | PMI

Private mortgage insurance or PMI has been drawing flak for a long time, especially from old-timers in the real estate world. Despite the negative thinking about it at this time when homes are more expensive than ever, David Sidoni is here to put an end to this grave misconception. In this episode, he explains how to actually use PMI and put real numbers into consideration to make your first-time home buying much more affordable. Tune in as he breaks down how you are probably a lot closer to making this purchase than you think.

PMI Is Still A Privilege And Still Not The Devil

This is the follow-up episode to Episode 198. Housing affordability is getting a lot of negative press right now, and it is true. Homes are more expensive than ever, but that’s not going anywhere anytime soon. I’m hearing from lots of people that they are never going to be able to do it now because they can’t save 20%, and the reason for that is they think that they have to avoid PMI.

You’re probably right. It’s going to be tough to save 20% down and get into the market at these prices, so let’s get on the solution side of this. It’s a new era and you need to know that there is new math that utilizes leverage so you can stop renting and buy a home sooner. You don’t need 20% down and that’s not only okay for many of you out there. It might be the only way to do it. If PMI is what’s holding you back, I’m here to bust the myth. PMI is not the devil. It’s not expensive. It’s not a dumb move. PMI is actually a privilege. Let me explain.

What’s up, my Homies? I’m here with a deep dive Mythbuster version of the show and also real numbers that I have you realizing you’re probably a lot closer to buying your first home than you think.

This is for all you people who might have got caught in the rabbit hole googling all the things about 20% down and PMI and hearing all the haters out there. There’s only one way for me to talk to the haters and that’s not with opinion and screaming. Are you hearing me, Steven A. Smith? We’re not screaming. We’re going to have an intellectual conversation and I’m going to go even one step further. We’re going to be using real numbers. 

It shows you that in this less affordable market, which is what we’re heading into, using a low down payment and leveraging the privilege of a very small PMI payment can save you years of wasted rent money. I keep saying rent over and over again, and I’m just hearing Rent the Musical in my head so many times, “We are not going to pay last year’s rent.” I’m going to contradict a lot of the OG philosophies that many financial gurus and, for that matter, many parents, grandparents, aunts, and uncles swear by, but remember, I, too, am old.

I’ve been around long enough to know why they said that when they said that. I’m telling you it’s because of old math and it doesn’t work for today’s buyers in today’s economy with today’s numbers. If you need more convincing of this, read the entire Episode 198 first. That’s where I go a little psycho-ragging on the Boomers and their ridiculous old philosophies. I am not a Boomer myself, even though I’m old. I’m just an OG Gen Xer.

I’m going to repeat one excerpt from that episode if you don’t need to read all that rigmarole before because I actually made up a saying right on the spot during the last episode and I really like it. Old timers have messed with your brains telling you that PMI is the devil and now many people reach out to me and they end up dwelling so hard on the PMI they get stuck in. “What do I do? 20%, should I or shouldn’t I?” They get in these crazy home buyer equation evaluations. 

The math says that this ominous PMI that they’re so scared of is a freaking pennies worth of pain for a dollar’s worth of worry. That’s the saying I made up and I love it. PMI is a penny’s worth of mathematical fiscal pain, but many of you worry about it like it’s a dollar’s worth of a problem. A penny’s worth of paying for a dollar’s worth of worry. I love that.

PMI is a penny’s worth of pain for a dollar’s worth of worry.

What is PMI?

First, before I get going on this one, I’m going to give you a brief explanation of PMI and then we’ll get into these numbers. This is not Homeowners Insurance. That’s the first thing you need to know. This is Private Mortgage Insurance. This is not Homeowners Insurance, which is the I in PITI. That’s totally different. If you go online and research what PMI is, you’ll get these definitions and I will break them down for you in layman’s terms, but here’s what you’re going to read. PMI is a type of insurance that may be required for conventional mortgage loan borrowers when they buy a home and they get a down payment of less than 20% of the home’s purchase price.

PMI then becomes part of your mortgage payment. It protects your lender if you stop making payments on your loan. This is not insurance for you. This is an extra payment that you pay so that the lender is insured in case you get hit by a bus or you stop paying your payments. PMI payments are typically added to mortgage payments along with the property taxes, and the homeowner’s insurance payment. PMI is recalculated yearly. It will go down as you pay off your loan balance. Not only is PMI in the first year not too expensive, but PMI is recalculated annually. It’s going to go down every year as you pay down your loan balance. 

After you buy the home, you can typically request to stop paying PMI once you’ve reached 20% equity in your home. A lot of the time, PMI is automatically canceled once you reach 22% equity. Some more stuff you’ll read is that PMI only applies to conventional loans other type of loans often include their own mortgage insurance. For example, FHA Loans. They require Mortgage Insurance Premiums, which gets confusing because that’s MIP and they operate differently from PMI. We’ll get into FHA and the MIP at the end of the episode. 

You’re also going to find these facts when you search on the internet and get in that rabbit hole. PMI does protect the lender, not you. PMI is arranged by the lender and provided by Private Mortgage Insurance companies. You don’t have to go out there and find your insurance like you do for homeowners insurance. Make no mistake. This insurance is not to protect you. It’s not protecting you in case you get late on your payments. If you are late on your payments and you are late for way too long and you get foreclosed on, this is not insurance. This is insurance for the lender, not insurance for you.

There were some places that actually said some good things. I liked it. The CFPB website actually talked about the fact that PMI can help you qualify for a loan you might not otherwise be able to get, but of course, that does increase the monthly cost of your loan, but it’s a loan you can’t get anyway. This is why I say that PMI is a privilege. It’s not a burden or something you should try to avoid like the plague. It’s something to use to your advantage.

PMI gives you the privilege of being able to buy a home before you’re able to save up the full 20%. Of course, that privilege has a price, but I’m telling you, it is not nearly as demonic or expensive as those old dinosaurs are telling you. PMI does have a cost, but it’s not even close to what the old-timers are telling you.

How to Buy a Home | PMI
PMI: PMI is a privilege. It is not a burden or something you should avoid like the plague. Use it to your advantage to be able to buy a home before you can save up the full 20% downpayment.

How PMI Works

I could keep going and explain all the nitty-gritty of how it works, but I can’t wait. Let me get you some practical sample numbers. This is how PMI works right now if you’re going out to buy the average $400,000 home. Check out these numbers and see if you understand what I’m talking about. If you have decent credit, just a 700 score. Now, I’m not talking about great credit. I’m talking about decent credit a 700 score and you put 10% down on a $400,000 home. Your PMI costs you a whopping $99 a month.

That’s it. For $99 a month, you can put 10% down on $400,000. That’s only $40,000 versus $80,000. I am going to use this as an example because it’s kind of right in the middle of the road. The better the credit, the better your pricing is going to get on PMI, but for this example, I’m going to give you good credit. 700 is not great. 750 is great. We’re going to do 700 good, not great. This will show you how affordable that $99 in PMI is and PMI is not the devil. With just good credit and 10% down, it is only $99. That $99 gets lower as you pay it off. Here’s the thing. The $99 a month is not forever. In most cases, it automatically goes away when the home’s loan-to-value hits 78%.

You can calculate the loan-to-value by understanding it this way. The day you bought the home, you bought it with 10% down. Your loan is 90% of the value of the home. You’re at 90% loan-to-value with 10% down. As you keep making your payments, your loan-to-value or LTV gets lower because you’re paying off the principal with each payment, but that LTV will also lower as the value goes up. If you start in at 90% and then pay $4,000 of principal off in your first year, which is about the amount you would pay if you’re paying on an amortized 30-year fixed loan at interest rates nowadays. If you don’t know what all that means, it’s all good. Just go with it.

How to Buy a Home | PMI
PMI: When you’re at 90% loan to value with 10% down as you keep making your payments, your LTV gets lower. You are paying off the principle with each payment. LTV will also lower as the value goes up.

If you pay $4,000 in principal over the first year, you start at 10% now plus that $4,000 out of a $400,000 home, that’s about 1%. Now, you went from 90% LTV to 89% LTV. If the home goes up and I’ll give you a super conservative number, 4%, the national average for the last 100 years. Appreciation at 4%.

Now you get to subtract that 4% from the LTV because the V is for value and you’ve gone up 4% and your loan-to-value has dropped and now you went from 89% to 85% in one year. That means all you need is the loan-to-value to decrease another 5% and your PMI is gone. That $99 a month payment is gone. I also want to remind you I’m only giving you the 4%. If you buy now, you’re going to be hitting way more than 4% appreciation. Your value is going to be up and you’re going to be at that within a year. 

Let’s go back to the math. This highlights the privilege of understanding these numbers. If you’ve got decent credit, a 700 credit score, you put 10% down $400,000 home, your PMI is $99 a month. The old timers are going to tell you, “Don’t forget your monthly payment’s going to be so much higher.” Old timer, no. At a 7% interest rate, each $10,000 that you need to borrow is going to cost you a total of about $80 in principal and interest. 

Your 10% less down payment, instead of $80,000, you’re only putting $40,000 down. Of course, that means you’re paying $40,000 more. If it’s $40,000 and it’s $80 per $10,000, we’re going to do 80 times 4 for $40,000, that equals to $320 more a month. Sure, that is absolutely a good chunk of change, but here’s where you can explain the math to them because they are going to freak out and say, “It’s an extra $320 a month. Plus, you have to pay that stupid PMI. You should just wait until you get to 20%.” 

The extra 320 a month, I understand that’s a chunk of change. The PMI is $99, but that’s $419 to have an extra $40,000 in the bank. Let’s think about that. I invite you to respond to that old timer who says, “Don’t do that. That’s stupid, save 20%. You don’t want to pay PMI. That’s for dummies.” Respond to them with this answer, “Chief, do you know that by accepting the PMI in the first year of owning the home, PMI is going to cost me a whopping grand total of $1,188? That’s all. $99 times 12. The extra 10% loan cost, that’s going to cost me an extra $3,840 in the first year. That’s $320 a month times 12.”

The grand total, I’m going to pay in the first year to buy a home now at 10% down instead of waiting until I have 20% down, it’s going to cost me $5,028. What I decided is that by getting the home with only 10% down and being able to buy it now, I just loaned myself the other 10%, $40,000 in cash, for only 12 monthly payments of $419. For our first year in the home, even if you take away 12 months of the extra $419, at the end of the year, if I did 10% instead of 20%, I have $36,160 cash left over.”

“Even if I had it now, I’m not sure I would do that or we could end up cutting 10% down instead of trying to save up for 20%. Maybe we’ll save up to 12% or 13% and still do 10% down and we can use some of that extra money for home Improvements. Those home improvements are going to increase our loan-to-value and that means the PMI is going to go away even faster.”

“Old timer, I love the privilege of PMI. For the first year, it’s a $40,000 loan that costs me $419 a month. That’s peanuts. That’s like 1% of the $40,000 that I’m going to be paying for. The other thing, too, is I keep paying it off, and PMI gets lower every year. I am Dope Daddy and I read the How To Buy a Home show, I use this method to buy with a lower down payment in the spring of 2024 and it looks like my first year’s appreciation is going to be 10%,11% or 12% so that PMI is only a loan for a year.”

“My loan-to-value going to hit 78% and I’m going to be able to get rid of it. As far as the extra payment on the house, it looks like the rates are going to be going down, too, so I can reduce my payments even more with a refinance. I forgot, old timer. Here’s the one big thing. I didn’t pay $2,200 a month to my landlord, which went to absolutely nothing, zero return, while I was trying to save up the other $40,000 to get to 20% to avoid this nasty PMI.” That’s all you need to say.

PMI is a privilege. It’s $40,000 that you would have to save up or you can make installment payments for $419 a month and reap all the benefits of being a homeowner and stop paying your rent. If you’re freaking out about adding $419 to the monthly numbers that you’ve already been running, I completely understand that. I empathize with that. I get that. I know that mortgage numbers can seem really high, but it doesn’t reduce it by that much when you consider how long it’s going to take you to save another $40,000, another 10%, and how much rent you’re going to be throwing to nothing.

How to Buy a Home | PMI
PMI: With PMI, you don’t have to save up to $40,000. Instead, you can make installment payments, reap all the benefits of being a homeowner, and stop paying your rent.

This is your way into what is turning into a pretty unaffordable market and of course, that’s due to supply and demand, which we know inexplicably is going to keep going, which means prices are going to keep going up. I think about it this way. If you’re sitting there with 15% already saved and you’re like, “I’m so close, David. I could just save the other 5% to get to 20%.” Think of it this way. You have $60,000 saved, 15% of the $400,000 purchase.

You can keep saving and lose that rent money, or you could go out and buy a home tomorrow with 10% down and $40,000, and you could stop renting and start owning immediately. Yes, it’s going to be $419 more a month than if you waited to save up, but if you buy it 10% and you had 15%, you’re going to have $20,000 in the bank, a savings account. You could pay that extra $419 a month for 47.7 months with the extra $20,000 that you’ve got in the bank. 

You’re not going to have to wait long for that to hit 78% or 80% LTV and get rid of it. If I had 15% or 18%, I might even look at doing the lowest down payment I could. I can get deeper into this, but I already did that on Episode 198. This episode is just a reminder for you. If you need more clarification, if you’re still not convinced that PMI is a privilege to help you and not the devil, something that means you can stop renting sooner, do me a favor and go read this again. I wish I had a whiteboard and charts and graphs. You have to go read it a few times to make sure you understand it. Just the math part where I tell you to tell off the old timer because you’ve got better math. 

PMI With A Great Credit Score

Let me go ahead and give you another example because that was $400,000 with a good credit score and 10% down. What if that’s not you? Here’s some exciting news. If you’ve got great credit, like 750, you can get almost the exact same numbers with only a 5% down payment. A 5% down payment will cost you about $115, so $16 more than the $99 in PMI payments.

Of course, you’re going to have a little bit extra because you’ve got 5% more on the loan amount, but it’s not going to cost you that much more. If you’re talking about 5% down versus 10% down, you’re sitting there with a huge extra chunk of cash compared to our last scenario and you’re able to get in and buy and get rid of renting.

Think about that. How long would you have to save and how much rent would you pay if you’re at 6% or 7% now and you try to save all the way to a 20% down payment? If you’re sitting there with $24,000, $25,000, a little over that 5% but you have to get to $80,000 feels insurmountable. If you’ve got great credit, you can do all the numbers we ran for the good credit right around the same price. What if we go even lower on the down payment?

The next scenario, $400,000 with a great 750 credit score and only a 3% down payment. If you can get a conventional loan with a 3% down payment, you’re looking at only $180 a month or $2,160 a year in PMI. The difference in your mortgage of 20%, just the price for the loan, which is $456 a month. That’s the difference between 20% down or 3% down because you’ve got to pay that extra 17%. That’s $456 more. That’s an extra $5,472 than if you put down the 20%, but if you had the 20%, you would have $80,000.

Three percent down is only $12,000. You can try to buy a home now for $12,000 down. Yes, if you try to save up to $80,000, your new payment would be a grand total of $180 plus $456. The PMI is $180 and it’s $456 for the extra loan. You could buy now at $12,000 or you could get all the way to $80,000 because you want to make sure that you save a grand total of $636 a month.

Yeah, I get it. Of course, it’s going to be cheaper if you have $80,000 down, but if you can do $636 more a month, then that’s the only thing you’re saving for the years and years that it’s going to cost you to pay rent while you’re also trying to save $80,000 a month. How long until you have an extra $68,000? How many months of rent?

I could argue this. If you’re a younger buyer and by younger, I mean anybody 25 to 35, if you have the 20% down now, I would argue that as a younger person, if you’re still renting, maybe you look at not putting the whole 20% down because then you’re going to be left with very little and then you’re going to say what so many readers tell me, ”I don’t want to be house-poor.” I would argue that for your own security and stability, it makes more mathematical sense to use the least amount of down payment you can. Look at it this way. If you put 3% down and you have the 20%, you’d be paying an extra $636 a month than if you put the full 20% down, but you would have $68,000 in the bank.

That’s 106.9 months to pay the extra $636. That’s complete security. That’s you not feeling house-poor. Take that $636 a month out of that $68,000 and you’re still left with a buttload of money. If you fully comprehend the math, you’ll realize the PMI is a loan to yourself and if you have more than 3% or 5% or 10% down, you can go with the lower down payment and keep the extra money in the bank while you get used to that new mortgage payment and of course to help you with the horrific cost of that PMI. At the same time, you’re going to be gaining appreciation for the home. That PMI will get lower as you pay down your loan and it will go away eventually and faster than you think. You will stop wasting rent money that goes towards nothing.

Rent Replacement Strategy

In the show, I’ve been talking about the rent replacement strategy. I often talked about buying a home as not getting your dream home or your big wish. Take buying a home off of your vision board and slap rent on a damn boring spreadsheet. Look at that every day. I know I never tell you to look at the negative stuff but look at the negative. Realize when you’re digesting those numbers, highlighting the rent that you’re paying every day if you put that on top of your vision board, maybe that’ll help you comprehend the rent replacement strategy. It’s not the old days.

Take home buying off of your vision board and slap rent on a damn boring spreadsheet.

For some of you, maybe you are in a great position. Maybe you did save a ton and you’re going to be able to buy your dream home, but for many of you out there, buying your home has become a rent replacement strategy and you’re looking more at a starter home. A home that might have some compromises, but it’s a great first step for you, that first foundation of building your financial stability. It might not be your perfect dream, but it’s a rent replacement strategy and it’s the first step to achieving your dream in this new economy and the new way of buying a home.

FHA Loans

I know I mentioned it to you earlier, but if you do need to buy an FHA loan for some reason, which some of you might have to do, it’s not a bad thing. Tons of first-time buyers use an FHA loan and it is not the devil too. It’s not even the little devils that surround the Heat Miser in the Christmas claymation spectacular The Year Without Santa Claus, those little mini demons that bounce on the shovels like pogo sticks. FHA Loans are not even those little mini-devil dudes. If you want to read all about the FHA loans and how they work with PMI or MIP, you can go back to Episode 198. I address the details of all that at the end of the episode.

Moratorium. I am done discussing PMI now. You have two full episodes to digest this math. I know some of you zoned out when I was going through the actual math examples. This is not a theory. This is math and if you don’t understand it, do yourself a favor and don’t believe what some old timer tells you if they didn’t give you the same amount of data that I did to back up their opinion.

It’s an opinion. PMI is turned into an old wives’ tale with people simply regurgitating one opinion that they heard decades ago, and it’s passed down and passed down, sometimes like a horrible game of telephone and there’s new stuff thrown into there that someone just made up. Most importantly, nowadays, it doesn’t make any sense with the math. It’s not math.

PMI turned into an old wives’ tale with people simply regurgitating one opinion they heard decades ago. Sometimes, new stuff is thrown into it even if someone just made it up.

It’s just an old opinion, an old standard guideline. If those people have some kind of math they’re throwing out to you, ask yourself this, “Is it math for today? Is this dated math?” Ask yourself this, “Is it too freaking a full episode full of math?” If you’re not bored to tears listening to them like I’m positive that you have been reading these two episodes, then I am positive that I have more math than they do. Math wins. This crap is important to start the revolution for first-time home buyers. We need to change the narrative. We need to bring things into this discussion about now.

I love it. We can help our fellow man. It’s not very easy for the little guy anymore. We need to lift each other up and help everybody achieve the Canadian and American Rent Replacement Strategy. Help feed the solution by not just rating with stars on the show but taking one minute and typing your review on Apple and Spotify. Please, if you’re getting any value from this, type a review because that will help so much. That will mean that we can help more people.

Of course, you can always check out the show and all kinds of videos on Instagram, TikTok, and YouTube. Also, if you’re out there, people on Reddit or talk about the show, jump in and spread the word. Tell everybody on Reddit about the show. If you are ready to make your plan, go to HowToBuyAHome.com and ask David.

In this revolution, I picture all of us marching down the street in protests and I see many of you with banners and then I see some of you with these big signs and you’ve painted on them, “PMI is not,” and then you paint it a picture of the devil. Viva La Revolucion. Knowledge is power. Ignorance is not necessarily a negative. It simply just is. Admitting ignorance is the first step to not being ignorant. We use education to empower. Of course, my favorite new saying, “PMI is a penny’s worth of mathematical fiscal pain, but many of you worry about it like it’s a dollar’s worth of a problem.” Homies, go forth and conquer. You can do this.

Important Links

This podcast was started for YOU, to demystify things for first time home buyers, and help crush the confusion. After helping first timers for over 13 years, I knew there wasn’t t a lot of clear, tangible, useable information out there on the internet, so I started this podcast. Help me spread the word to other people just like you, dying for answers. Tell your friends, family, and perhaps that random neighbor you REALLY want to move out about How to Buy a Home! A really easy way is to hit the share button and text it to your friends. Go for it, help someone out. And if you’re not already a regular listener, subscribe and get constant updates on the market. If you are a regular and learned something, help me help others – give the show a quick review in Apple Podcasts or wherever you get your podcasts, or write a review on Spotify. Let’s change the way the real estate industry treats you first time buyers, one buyer at a time, starting with you – and make sure your favorite people don’t get screwed by going into this HUGE step blind and confused. Viva la Unicorn Revolution!

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