Hey, Kyle here with WintheHouseYouLove.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 something that's required on conventional loans?
It's on other loans as well, but we're mainly talking 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.
Only protects the lender.
Doesn't actually protect you.
So it 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 basically it helps them recoup the money that they lost.
However, you're the one footing the bill for it.
So most people think oh, why would I want to get alone 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,
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, and I'm gonna show you how you can use PMI.
You can strategize it in a way, so that's actually an investment for you instead
of it just being something that is.
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 the 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.
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 PMI as a burden, but if we look at it mathematically,
it can actually be used as 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 conventional 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 our 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 5% down.
So that would be $21,250.
Okay.
Then for our interest rate, I have a quick link here that will take you
to when the house you love.com/rates.
So today's 30 year conforming loan average in the U S is 3.42.
So we'll run that three points.
Oops, 3.42, and then it will tell us 0.65% of the loan amount is
typical for mortgage insurance.
So that would be two 19 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 competitively.
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.
What we're comparing is it better to buy now or is it
better to wait to save 20% down?
Because right now we only have 5% saved.
Is it better to save the additional 15% over a period of time?
And then by that way, we don't have to pay mortgage insurance.
So let's look at what this looks like.
21,250 is 5% 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 that'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 $1,300 per month into savings?
That's a 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.
Or the past 30 years has been 2% every single year.
That's including the 2008 housing crash.
We have that number here as well.
And you can adjust this if you'd you can go 1% or 3% or
do whatever you'd like here.
2% is historic 30 year appreciation.
So 2% appreciation over 48 months, which is how long you were saying it.
At worst thing, it's going to take us to save that amount of money would make a
$425,000 home worth $460,000 and increase the needed down payment by $7,000.
Okay.
So even though we set our savings goal was 1300.
It actually needs to be closer to 1475 for 48 months to keep up with
the home appreciation as well.
And so if that's too high that 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 get some bonuses in there as well.
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.
What we're saying is we have two options here.
We could wait 48 months to buy a home and put 1475 per month for
48 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 going to save the 1475.
Into a savings account.
What if we actually prepaid the principle of our mortgage, we buy the home and then
we pay into the principle 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, but 20% down and that's 20% on that
appreciated value of the home and then put 1475 per month for 40 months.
And to see.
Or option B is by now put 5% down, which is around $21,000 and then put
1475 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 $7,000 in your down payment just to be able to buy a home.
On the plus side, though, your monthly payment would be lower by $158
per month in principal and interest.
Not to mention you wouldn't have to pay the $219 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
going to get, but we're not comparing is 20% down, better than 5% 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
1475 per month for 40 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.
This is what the P and I payment looks like.
And the PMI payment it 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 principle balance.
We would have gained $35,000 in appreciation based on that 2% year
over year appreciation, we would have paid $5,200 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 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 it's gonna cost me $5,200.
Yeah, but you also get to gain the historical appreciation
that we've seen at 2%.
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.
And so if they're taking out a loan, let's say at 6%.
But in the stock market, they earned 10%.
They actually gained 4%.
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 was 20% down or 5% down.
So the difference with the 5% down is you have the PMI cost with it.
And so PMI in this instance is 0.6, 5% of the loan amount and appreciation
is 2% 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 this, anything you'd ask
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, we're not using, appreciation last year was
around 15 to 17% across the U S we're not using crazy numbers like that.
We're using the historical average of 2%.
And so we're not going 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.
It gives you the most interest savings, but that's not what
we're looking at right now.
If we were comparing 20% now, versus 5% down, 20% down is always going to win.
But in this scenario you don't have 20% down.
You have maybe 5% down or 3% down.
Should you wait to save 20%.
So you don't have the cost of PMI 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.