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