Why PMI Isn't As Terrible As You Think

hey kyle here with winthouseylove.com as you've been looking into buying a home and getting a loan you've likely heard of the term pmi and it stands for private mortgage insurance and basically what pmi is is it's something that's required on conventional loans it's on other loans as well but we're mainly talk about conventional loans because it will fall off on conventional loans so it's required on conventional loans if you have less than 20 down as soon as you have 20 down that pmi private mortgage insurance can be removed but what it does is it only protects the lender doesn't actually protect you so protects the lender in case you default so if you don't pay back your loan and they have to foreclose it's an insurance that the lender uh basically helps them recoup the money that they lost however you're the one footing the bill for it so most people think uh oh why would i want to get a loan with private mortgage insurance when i could save 20 down and then buy a home that way and never have to pay private mortgage insurance and they see pmi as this really expensive cost because it can be you know a couple hundred dollars per month and of course we want to save as much money as possible but i want to show you a tool there's a free calculator link in the description that you can use that we're going to walk through i'm going to show you how you can use pmi you can strategize it in a way so it's actually an investment for you instead of it just being something that is an expense most people think about it just as a monthly expense they don't think about it in the opportunity that it gives them to buy a home so we're going to compare this scenario the scenario is and this again this calculator link is in the description for you to download for free scenario is wait to save 20 down or buy now and pay private mortgage insurance okay so we could say i'm going to wait to buy in the future and put money into savings or i'm going to buy now and choose to pay pmi and we want to look at the math of what this actually means for us instead of just going off of our gut feeling of pmi is bad i'm going to save 20 down is that actually the best option for you mathematically let's take a look through this so private mortgage insurance is required on conventional loans when you have less than 20 down pmi only protects the lender so most people view bmi as a burden but if we look at it mathematically it can actually be used as an investment okay so what we want to do is we want to put in our scenario first okay so we're just looking at conventional loans because pmi will fall off of commercial loans usually when you have 20 to 22 equity in the home on loans like fha usually you have mortgage insurance for the entire duration of the loan same with usda and va does not have monthly mortgage insurance so for a home purchase price you can put an estimate in here i also have a calculator that can help you see what an estimated max purchase price is depending on your scenario that you can download as well but for right now for this example we'll go with let's say we're going to go with 425 000 as a purchase price that we're looking at right now and now we want to put in if we could buy a home right now what was the minimum down payment we would use so 3 is the minimum for conventional loan for first time home buyers let's say we're looking at five percent down so that would be twenty one thousand two hundred fifty dollars okay then for our interest rate i have a quick link here that will take you to win the house you love dot com slash rates so today's 30-year conforming loan average in the u.s is 3.42 so we'll run that three-point oops 3.42 and then it will tell us 0.65 of the loan amount is typical for mortgage insurance so that would be 219 per month now in here you can make that higher if you want to or lower if you want to you'll want to shop with different lenders to find what mortgage insurance is going to run for you but if you're looking at competitive lenders 219 is going to be a really good estimate here and then the length of loan 15 years 20 years 30 years whatever that looks like so from this scenario what we're saying is if we bought a home today this is what the scenario that we would use so what we're comparing is is it better to buy now or is it better to wait to save twenty percent down right because right now we only have five percent saved is it better to save the additional fifteen percent over a period of time and then buy that way we don't have to pay mortgage insurance so let's look at what this looks like so 21 250 is five percent down to get to 20 down we need to save 85 000 so we have 63 750 left that we need to save so to reach 63 000 how long will it take you to save that amount of money so maybe it's 24 months right you're looking over here and saying 2 600 a month there's no way i can do that maybe it's 48 months can you save 1300 per month into savings that's the savings that's required to get you to 20 down to not have to pay mortgage insurance okay now what we want to keep in mind is let's say we're rolling with 48 months here over 48 months appreciation is likely going to increase the home value and historic appreciation over the past 30 years has been 2 every single year that's including the 2008 housing crash so we have that number here as well and you can adjust this if you'd like you can go one percent or three percent or do whatever you'd like here two percent is historic 30-year appreciation so two percent appreciation over 48 months which is how long your say it we're saying it's going to take us to save that amount of money would make a 425 000 home worth 460 thousand dollars and increase the needed down payment by seven thousand dollars okay so even though we said our savings goal was 1300 it actually needs to be closer to 14.75 for 48 months to keep up with the home appreciation as well and so if that's too high then we can increase this again so maybe we need to bump that up to 55 months and this is going to change depending on your scenario and maybe you get some bonuses in there as well just we're just going to run off of these averages for now so let's bring this to 48 just for the sake of the example so what we're seeing is we have two options here we could wait 48 months to buy a home and put 14.75 per month 448 months into a savings account and then at the end once we have all that money for 20 down we buy the home and we don't have to pay pmi or we could buy the home now with 5 down we were already saying we were going to save the 14.75 a month into a savings account what if we actually prepaid the principal of our mortgage we buy the home and then we pay into the principal of the mortgage what would that do so we're basically treating our mortgage like the savings account instead of a savings account and then buying the mortgage so option a is buy in 48 months put 20 percent down and that's 20 on that appreciated value of that home and then put 14.75 per month for 40 months into savings or option b is by now put 5 down which is around 21 000 and then put 14.75 for 48 months into the mortgage what difference would that make here so option a waiting to save 20 down in 48 months the value of the home you're looking at would increase by 35 000 and you need an additional seven thousand dollars in your down payment just be able to buy the home on the plus side though your monthly payment would be lower by 158 dollars per month in principle and interest not to mention you wouldn't have to pay the 219 dollars per month in pmi now what we want to also consider is we're not comparing the interest savings of a 20 down loan because the more down you put the more interest savings you're gonna get but we're not comparing is 20 down better than five percent down we're comparing buy now versus buy later so the home value increases in 48 months the monthly payment decreases but the down payment increases as well now option b is to buy now and pay pmi so to avoid pmi and put 20 down on a home you need to save 14.75 per month for 48 months instead you could buy a home now and put that savings directly into the mortgage principal each month this will help you take advantage of home appreciation and remove private mortgage insurance quickly so this is what the p i payment looks like and the mi payment looks like but what's interesting is in 48 months we bought the home we've owned it for 48 months and we've been putting 1475 into the principal balance we would have gained thirty five thousand dollars in appreciation based on the two percent year-over-year appreciation we would have paid fifty two hundred dollars in pmi already this is a much better deal the pmi was just a cost for us to be able to take advantage of appreciation and then we have to keep in mind too that when mortgage insurance gets removed because of the home value increasing we're going to need a new appraisal done because the lender is going to base the value of your home on the purchase price and not on what the new of raised value would be because they don't have an appraisal so we'd have to pay for an appraisal in the future even factoring that in we have a net benefit of almost 30 000 instead of waiting to save 20 and then buying and so we can see this chart here this is the appreciation gain that you'd be seeing over that 48 months and then here is the cost of pmi something interesting that happens here is it flatlines it's because pmi actually falls off after two years because of this strategy before if you didn't have anything paid into the mortgage pmi would have fallen off after 50 months but because you were paying this extra money into the mortgage it falls off after 24. months okay so because we bought the home now and chose to pay private mortgage insurance it costs us money and i think what a lot of people do is they're like well it's going to cost me 5 200 yeah but you also get to gain the historical appreciation that we've seen it two percent and if that increases then you're seeing appreciation of 35 000 that you would have missed out on if you only put that money into a savings account and this is very similar to how investors trade with margin accounts with with stocks so a lot of savvy investors will actually take out loans to invest in the stock market so if they're taking out a loan let's say at six percent but in the stock market they earn 10 they actually gained four percent it's the same thing that's happening here with pmi right you're going to pay interest on the loan no matter if it's 20 dollar 5 down so the difference with the 5 down is you have the pmi cost with it and so pmi in this instance is point six five percent of the loan amount and appreciation is two percent of the purchase price so already there's this huge difference you are always going to be on top as long as the appreciation is higher than the pmi cost percentage okay so in that instance pmi almost always is really easy to use and strategize as an investment now maybe you're looking at something like i still i don't want to pay pmi that's perfectly fine you do what works best for you just understand this is how the math works out if we're looking at historical data we're not trying to make anything seem bigger than it is right we're not using you know appreciation last year was around 15 to 17 percent across the us we're not using crazy numbers like that we're using the historical average of two percent and so we're not going uh totally off base here we're just looking at what does the data tell us about these two decisions of course the higher down payment gives you the most interest savings but that's not what we're looking at right now if we were comparing 20 down versus five percent down twenty percent down is always going to win but in this scenario you don't have twenty percent down you have maybe five percent down or three percent down okay should you wait to save 20 so you don't have the cost of bmi or do you leverage pmi as an opportunity to help you use your home to gain that appreciation where otherwise you wouldn't have been able to have it so the link to this calculator is in the description if you want to try it out let me know how it goes for you

Channel: Win The House You Love

Views: 32,724

Keywords: win the house you love, kyle seagraves

Id: pJ6KiK4C0wQ

Length: 12min 39sec (759 seconds)

Published: Wed Jan 05 2022