PMI Cancelled! W00t!

I have some thoughts on a lot of this, but things would turn political quickly

ProDarwin wrote: I have some thoughts on a lot of this, but things would turn political quickly

I like that we've (mostly) steered away from the political here. Granted, there are things here that politics might affect, but I would like to keep it more...pragmatic? We can debate what we think politicians should do, but the way to make good financial decisions (at least, inasmuch as they depend upon economic factors with political ramifications) is to figure out what they will probably do, which is a lot harder.

John Welsh wrote: In reply to volvoclearinghouse: Very thought provoking. Thanks for taking the time to write it. I know that is not a small task (at least for me) to organize all those thoughts.

Thanks for the compliment, though I don't know how well-deserved it was. Re-reading what I wrote, it seems to be kindof all over the place. I guess that's where I am right now. I'm torn between two camps:

"Those who do not learn from history shall be condemned to repeat it" (George Santayana)

and

"The only thing we can learn from history is, we cannot learn anything from history" (Georg Hegel)

ProDarwin wrote: I have some thoughts on a lot of this, but things would turn political quickly

My only thought on this that's political is that everyone wants their nest feathered while someone else makes the "change" that it appeared everyone wants to see. My state is possibly the worst offender so I see it first hand. Term limits and progressivism seem like awesome ideas to bring our country forward but because we can't see further than getting a new highway or military base, the Senate majority leader keeps plaguing the nation.

.........sorry if this trended too political, just pointing out that most people are guilty of wanting someone else to do the unpleasant work

In reply to volvoclearinghouse:

In times of great uncertainty, I typically plan to move forward with a cautious or conservative approach. It may or may not end up having the best outcome, but it almost certainly won't have the worst possible outcome. Plan for the worst and hope for the best.

The reason it's hard not to get political with this is that most of the changes we've seen lately have been very political. For instance the Dodd-Frank Act, which is what gave us most of the recent changes, was a purely political move to be able to say "See we're doing something so now vote for us" rather a studied move to determine what would be the best things to keep and what to change.

Dodd-Frank also turned many of the rules we had in the past into laws which means it will literally take an act of Congress to change them and that requires politics.

But none of that is neither here nor there to the wondrous event of getting rid of your Mortgage Insurance.

For anyone thinking of buying a home soon you've just gotten some good news in that Conventional loans just had some major positive changes that give you a viable alternative to FHA loans. They've raised their Debt to Income ratios, made it easier to buy if you are self employed, greatly reduced the methodology of calculating student loan debt which will keep many people from being student loan poor, gotten rid of the old maximum of 4 loans for investment properties, and several other things.

You can buy a house with only 3% down on a Conventional loan whereas FHA requires 3.5%. Not a big difference, but since most people still think you need 20% down it's important to know that.

The great thing about Conventional loans over FHA is the way they handle their Mortgage Insurance. The more money you put down the less expensive your mortgage insurance will be, which is as it should be. FHA charges the same regardless of how much you put down.

Also Conventional mortgage insurance will drop off whenever your loan balance reaches 78-80%, but FHA stays on for the life of the loan.

I was calculating the payment differences with different down payments for a girl yesterday and her MI ranged from $300 a month to $26 a month depending upon her downpayment. The MI drop was actually more than the payment drop from a lower loan amounts.

volvoclearinghouse you made an interesting point:

"I don't know that we're going to see economic growth like we've seen in the past again. I look back over the past ~80 years and I see a) economic growth fueled by WWII and it's aftermath, where the U.S. was the powerhouse of the world and basically everywhere else was a developing nation. And then I see b) The Baby Boom generation, a big population increase, particularly in the middle class. Next there's c) women entering the workforce in large numbers, effectively increasing many households' income by 50% or more. Then, d) interest rates dropped, which allowed massive borrowing to fuel spending to drive the economy.

I just don't know where we go from here"

What do we have to fuel future growth? Where is our growth industry?

After WWII we were primarily the only producing country left with a good infrastructure and it "put us on the map", but now the colleges are putting out thinkers not producers so what will fuel our economy in the future?

Getting to count a woman's income to qualify for a home fueled one of the biggest housing inflationary periods because suddenly we all could buy lot bigger homes - and we did!! That pushed prices up and increased home ownership rates. I remember having to get notes from a woman's doctor saying they weren't going to have any more babies so that we were allowed to count 50% of her income - and then it was only nurses & teachers incomes that counted.

In reply to carguy123:

Exactly. I did a quick analysis a couple of years ago and found that in 1950, the average home sales price was about 1.6 times the average household income. In 2010, the ratio was up close to 3.0. That's a doubling of the average home price relative to average income. Some of that has to be due to the number of dual income families out there driving up demand and prices.

But, there's no 3rd spouse (unless you're a Mormon) so where's the new income going to come from to jack up home prices further?

As for the politics...I think we can all agree that regardless of one's party stripes (and Mrs VCH and I do lean pretty conservative/ libertarian) the current political duality, particularly at the national level, is more about cronyism and feathering one's bed as much as possible. Hence why I feel debating it is pointless. I dropped off Facebook a few months ago and refuse to get into political debates anymore.

I remember 15 years ago looking at my mortgage statement. PMI. Huh. WTF is that? I dug into it and found that it was a scam, as described earlier, insurance that I had to pay for the bank so that they would get paid and the house if I defaulted. Additionally, it was even a scam from that standpoint, as the world found out in 2008-2009, in that the so called PMI insurance companies just took money in and never paid it out, just bankrupted. And... It's Gone. To get rid of PMI, I had to get the house appraised. Cost me four bills. PMI was a bill a month, so break even on that was 4 months. I just kept sending the same amount in and noticed that the amount going to principal actually started increasing at an increasing rate. Second derivative or some E36 M3. Started throwing more and more at it and in a few years, it was paid off. BERKELEY YOU BANK OF AMERICA.

Dr. Hess wrote: I remember 15 years ago looking at my mortgage statement. PMI. Huh. WTF is that? I dug into it and found that it was a scam, as described earlier, insurance that I had to pay for the bank so that they would get paid and the house if I defaulted. Additionally, it was even a scam from that standpoint, as the world found out in 2008-2009, in that the so called PMI insurance companies just took money in and never paid it out, just bankrupted. And... It's Gone. To get rid of PMI, I had to get the house appraised. Cost me four bills. PMI was a bill a month, so break even on that was 4 months. I just kept sending the same amount in and noticed that the amount going to principal actually started increasing at an increasing rate. Second derivative or some E36 M3. Started throwing more and more at it and in a few years, it was paid off. BERKELEY YOU BANK OF AMERICA.

"I know it's crooked, but it's the only game in town."

Edit: About 8 or 10 years ago, I had an interesting conversation with a non-native coworker when I was buying my first house. I was explaining how the compound interest and PMI worked over here, and that my 180k house would cost me 300k if I paid the minimum over the whole mortgage, and he was shocked because in his home country you had to have the money up front to buy property, or at least most of it. He couldn't believe anyone would do it, and I used that exact line with him then.

They also rarely rented apartments and lived with their parents/family until they could afford their own place, so he wasn't factoring the "loss" of renting.

The trade off with PMI is downpayment. If you've got enough downpayment you don't have to buy it. If you expect to buy a house with a smaller down then you either pay PMI or you don't get to buy a home. What's scammy about that?

You're complaining that you didn't default so you didn't have to use it? Isn't that like paying your car insurance and not getting into a wreck and then saying that's a scam because you didn't use it?

Until about 80 years ago, if you wanted to buy a house in the U.S., you had to put at least 50% down and you got a loan for 3-5 years with a balloon payment at the end. Most people rented.

The 30 year mortgage has been the single largest creator of wealth in this country. Between amortization and appreciation, if you are 'middle class', there's a good chance you can thank a bank for giving your parents/grandparents a long term, fixed rate mortgage. In the vast majority of cases, first time homebuyers used some flavor of mortgage insurance to facilitate a low down-payment.

PMI and loan securitization (think Fannie Mae) have driven home ownership rates to include almost 2/3rds of Americans, creating wealth, stable neighborhoods and opportunity. Heck, children of homeowners even do better in school then their peers who live in rental units.

You're right, what a terrible 'scam'!

Sorry, SCAM. If I borrow money on a collateralized loan such as a house, why do I have to purchase insurance for the lender? That's their cost of doing business. Plus, they get the house if I default. They should do due diligence and not loan money on something that is not worth it, not try to pawn their risk off on a 3rd party. And, that 3rd party has zero intentions of every paying on that insurance policy in the first place (see HISTORY). So that 3rd party is just taking money literally for nothing. SCAM.

And I owned houses (well, me and the bank) before PMI came along. You know what? If a bank loaned money on deals that were good for them, there was no PMI and banks didn't need to get bailed out. Savings and home associations started scamming, resulting in that bust, by loaning money on property they knew full well was not worth it and created the first mess. Is that when this PMI crap came along? I remember in '08 thinking, hey, I need to short the PMI companies. There were 2 big ones. By the time I looked at it, they had already dropped half in stock price and I thought "Too late." Then they went all the way to zero. Oh well. Missed opportunity.

And that, folks, illustrates the difference between being informed and being opinionated.

I'm out.

Years ago I had PMI and part of my mortgage. It was only for the first 2 years and was canceled automatically. I had set up my mortgage to be paid automatically plus $100 but when the PMI was canceled after the first 2 years I never changed the auto-pay and ended up taking something like an additional 10 years of my mortgage because both the PMI payment amount and the extra $100 was going to principal.

Dr. Hess the Mortgage Insurance went into effect long before the S&L issues. It actually began in the 1930's with FHA. As did low down payment loans, building standards (they wanted to be sure the property would last for the life of the loan) and qualifying for a loan based upon income, outgo & credit rather than your good looks or because you were someone's brother-in-law. FHA changed the whole way mortgages were done.

An 80% loan used to mean you put down 80%. FHA flipped that and began making 80% loans where you only put down 20%. But they couldn't fund all those loans themselves so they had to go to outside investors (which became the secondary market) and these investors wouldn't loan money on those ridiculous terms unless someone insured a portion of the losses. So FHA began insuring those loans.

You don't have to use MI even today as long as you get a Conventional loan (and only a Conventional loan) and you put down at least 20%. It's your choice.

There is of course another option - isn't there always? Don't get a mortgage. I don't mean don't buy a house, but instead get a loan from a hard money lender who might let you do less than 20% down with no MI, but their terms are most likely going to be 10 years, probably with a balloon and add about 3-5% to your interest rate for taking the extra risk.

But if you want the lowest downpayment, best terms and best rates then you must work around the MI system.

BTW PMI companies really do pay out millions in claims when the owners default.

The way I look at it, if you take out a loan, whoever loans you the money should be looking at the entire package. Like with a car: Bad credit risk people pay like 20% interest today, good credit risk people pay a couple percent. Offloading the risk to an "insurance" company, then securitizing the whole thing is a big part of how we (and I use that term very loosely, as I and most of us had nothing to do with it) have destroyed our economy again.

So, if you are not a good enough credit risk for that 4% mortgage without the equivalent of 1% additional charge for "insurance," then the loan should be at 5%.

And while the MI people may have paid out some today, what about 2008? Why did the rest of us have to bail out the banks? It was all supposed to be zero risk and all insured, right?

Now you're just being a curmudgeon!

The bank bailout had nothing to do with MI. That was mostly the Glass Stegall act that Clinton changed so that banks could gamble with the money.

MI only guarantees the top 20% or so which still leaves (wait a second while I count my fingers and toes) Drum Roll Please!!! - 80% at risk.

And they are looking at the whole package and part of that package is MI. You've saved money by having MI because MI is less expensive than the rate would have to be without it.

In reply to carguy123:

Not to mention, as I (the OP) noted, one can eradicate PMI from the loan with a combination of (gasp!) fiscal responsibility, and (stunned awe!) patience.

Click on carguy123's profile. He's in the mortgage biz. I kindof put some stock in his opinions and experience on this.