We were young, dumb, and impatient when we bought our house back in the spring of 2014. It was a great market to buy a house, and we were sick of renting. We had a lot of major expenses coming our way – our wedding was in December of 2014, and we were planning a honeymoon for the spring of 2015. So we had saved up a bunch of cash to make sure we could pay for all of these big life events.
So we went and got pre-approved for financing and started looking at houses. 14 houses later, we found our current home and put in an offer. While we were flush with cash, we were hesitant to put down 20%, so that we had an extra cushion for the wedding and the honeymoon. So we decided to put down 10%, a decision I regret to this day. That was the day PMI entered our life.
Private Mortgage Insurance, or PMI, is an insurance that you as the mortgage holder are typically required to pay if you put less than 20% down on your mortgage. PMI protects the lender in the event that you are unable to make your house payments. It is usually part of your monthly escrow payment. PMI is legally required to be dropped when you are scheduled to reach 78% equity, based on your amortization schedule, regardless of any extra payments you may make. That being said, once you reach 80% equity, you are able to request that your PMI be dropped. It’s important to keep in mind that just because you request the PMI to be removed, your lender is not legally obligated to do so. There are different kinds of PMI and different lenders handle them differently, so make sure you know your situation and talk to your lender about specific questions you have. Investopedia has a nice overview of PMI, this article is worth a read to go into the nitty gritty details of PMI. In short, you are paying the bank’s CYA for lending to you.
Fast forward 3.5 years. We had thrown away over $5000 in PMI payments. While we had talked numerous times about doing the work to get rid of PMI, we hadn’t pulled the trigger yet. At this point we had learned what financial independence is, and were doing a hard look at our expenses to see where we could cut back. PMI was an obvious thing to cut out.
Banks do not make it easy to get rid of PMI. We naively thought it would be as simple as make a lump sum payment to get us up to 20% equity, then giving the bank a call to request that they drop the PMI. Turns out it was harder than that. After we paid the large lump sum, we ended up needing to send a written request to have the PMI cancelled. That’s right, snail mail. We could have sent it in by fax but…I have no idea how to do that and mail seemed easier. The bank then had an appraisal done on our house, which we had to pay for of course, to ensure that the value hadn’t depreciated since we purchased it. Once that all went through, the PMI was dropped. The process took 2 months from start to finish.
Some thoughts on buying a mortgage and avoiding PMI:
- Buy a home that is well below your means. You will get approved for a mortgage way higher than you should actually have. Don’t get seduced by that number. Decide what your price ceiling is for a home, and stick to that.
- Do not, I repeat, DO NOT look at houses above that price ceiling. It’s not worth the temptation.
- This one is obvious, but make sure you can put at least 20% down. Then PMI won’t be something you have to worry about.
- For whatever reason, I was attached to the idea of putting down a percentage that was a multiple of 5, in our case 10%. 15% seemed like too much, and for some silly reason it didn’t occur to me that we could put down 12% or 13%. Don’t get stuck playing arbitrary number games like that. Know how much you can afford to put down, and just do it. Don’t be afraid to put down a few more percent if you can.
I cringe with regret and embarrassment when I think of the $5000+ that we wasted on PMI for 3.5 years. That $5000 could have been invested and at a 5% return rate, grown to $5500 over that 3.5 year time period. Or it’s money that could have gone straight to our mortgage principal, shaving 6 months off our mortgage, and saving us $3500 in interest over the life of the loan. That is in the past now though, and there is nothing to be done from it but learn from that mistake. Hopefully this post can help inspire those of you with PMI to take the steps to get it removed, or to avoid it in the first place if you don’t have a mortgage yet.
Do any of you carry PMI? What was your experience having it removed? Any other mortgage tips to share? Leave a note in the comments!