Making Sense of Private Mortgage Insurance

Photo: David Wright
Private mortgage insurance, or PMI, is often bad-mouthed as a terrible deal for consumers.

But without PMI, you might not be able to get a conventional home loan at all.

PMI is required on almost any conventional mortgage when the borrower doesn't make a 20% down payment.

And if you need to pay PMI, you’re in good company. About 25% of loans that closed at the end of last year required it. The younger you are, the more likely you'll need to pay PMI since you haven't had as much time to save.

Thanks to new lending guidelines enacted last December, you can put down as little as 3% these days, not 5%, and still get a conventional mortgage.

Other low-down-payment borrowers probably have just one other option: an FHA loan. The FHA lowered its mortgage insurance premiums in January from 1.35% of the monthly loan balance to 0.85% of the monthly loan balance, but you’ll still be stuck with FHA insurance for the life of the loan, whereas PMI eventually goes away.

Most borrowers will pay less with conventional PMI, but it depends on your down payment, credit score, loan term. Ask your lender to show you all your options. For higher-risk borrowers, the comparisons might look like those in the chart below.

Will you pay less with conventional or FHA?


3% down, $200,000 loan and 680 credit score
Conventional Loan with Private Mortgage Insurance*
FHA Loan with FHA Mortgage Insurance
Upfront mortgage insurance %
0.00%
1.75%
Upfront mortgage insurance amount
$0.00
$3,500.00
Total loan amount**
$200,000.00
$203,500.00
Monthly PMI %
1.31%
0.85%
Monthly PMI amount
$218.33
$144.15


5% down, $200,000 loan and 680 credit score
Conventional Loan with Private Mortgage Insurance*
FHA Loan with FHA Mortgage Insurance
Upfront mortgage insurance %
0.00%
1.75%
Upfront mortgage insurance amount
$0.00
$3,500.00
Total loan amount
$200,000.00
$203,500.00
Monthly PMI %
0.89%
0.85%
Monthly PMI amount
$148.33
$144.15
* Based on PMI rates from Radian, Genworth and MGIC.
Most borrowers roll the FHA’s up-front mortgage insurance into the loan balance.

Lenders look at your down payment, credit score and loan to get a number that they multiply against the amount you’re borrowing. The result is the annual cost of PMI. Divide that amount by 12 to get your monthly PMI payment. 

The higher the loan amount and the lower your credit score, the higher the monthly PMI you pay; the closer you get to 20% down and excellent credit, the lower the monthly PMI. 

There are several different companies that sell PMI, but their rates are similar, and you won't be able to choose, anyway. If your lender requires PMI, expect to pay monthly premiums for at least two years. At that point, you can cancel PMI if your home has appreciated enough or you've somehow prepaid enough principal to get to 25% equity.

Otherwise, you’ll have to pay PMI for at least five years and get to 20% equity, or 80% loan to value.

Canceling PMI costs money, too, because requires an appraisal to prove that your home is worth what you say it is. An appraisal might cost you $400 to $500. But don't order the appraisal yourself; your lender must order it directly or you won't be able to use it.

Market appreciation, improvements you’ve made or both could increase your equity quickly. Making extra principal payments is another way to reach the required 80% LTV.

How long will it take you to reach 80% loan-to-value just by making your scheduled monthly payments? Say you're borrowing $100,000 for 30 years at 4%, and your home’s purchase price was $110,000. When your loan closes, you’ll have 9% equity ($10,000 down payment divided by $110,000 purchase price). You’ll have 80% LTV when your loan balance is $88,000 (80% of $110,000).

Here's how to do the math. After plugging the loan amount, interest rate and term into a mortgage calculator, click on the amortization table tab and select the monthly option.

Scroll down until the number in the right column is $87,930 (the first point at which the balance drops below $88,000). Then look at the date in the far left column. In this example, it’s about six years into your mortgage. That's when you can contact your lender about canceling PMI.

(Also, when you sign your mortgage papers at closing, you should have received a disclosure notice providing the date when your loan is scheduled to reach 80% LTV.)

The good news is that federal law requires your lender to cancel PMI once you've paid your loan down to 78% of your home's purchase price, even if your home has lost value. No appraisal is required.

Waiting until you reach 78% means paying an extra year’s worth of PMI in this above example, however. Why not save your money by getting PMI canceled as soon as possible? The interest you'll save is probably more than the appraisal will cost. (You won't come out ahead, though, if your home appraises too low for you to cancel PMI.)

Contact your lender before you reach the 80% mark to ask what the official process is for canceling PMI so you’ll be prepared to ditch it. When you reach 80% LTV, submit your cancellation request in writing, making sure to carefully follow the lender’s requirements.

PMI cancellation, whether you’re at 80% or 78% LTV, is contingent upon your being current on the mortgage and having a timely repayment history. If you’re behind, you’ll have to catch up before your lender will cancel PMI.

To learn more about how much PMI costs, who it really protects and more, see my Interest.com article, "What you need to know about private mortgage insurance." I've also written "What you need to know about FHA mortgage insurance."

HGTV's "House Hunters" Finally Explains How Young Homebuyers Finance Fixer-Uppers

When you're just starting out and buying your first home, where do you get the cash to fix it up if it's not already in great condition?

Lots of first-time homebuyers find themselves in this situation: They're ready to own and they have enough income and savings to qualify for a mortgage, but they can barely afford the type of home and/or neighborhood they want to live in, and the home might need lots of improvements and renovations to fix deferred maintenance and outdated finishes.

If you watch House Hunters on HGTV, you've probably seen lots of homebuyers in this scenario. Something that's always bugged me is that the show doesn't explain how a cash-strapped young buyer can afford to renovate a fixer upper.

Finally, last night, I saw an episode called "22-Year-Old Seeks Victorian Fixer-Upper in Pittsburgh" that addressed this issue. The young woman said she had secured an FHA 203(k) loan so she could buy a fixer-upper. She had qualified to borrow $150,000, a sum that would have to both cover the purchase price and the renovations. She ended up buying a $70,000 home, which gave her plenty of funds to improve an old Victorian in an up-and-coming neighborhood.

The episode still didn't get into the details of how the 203(k) program works, so if you'd like to learn about a loan that can help you buy and renovate a fixer-upper, check out my recent Interest.com article, "How to Finance a Fixer-Upper."

Photo: revwarheart

Free Graze Box Promo Codes

Graze raspberry and coconut muffin snack
Would you like to get a free box of interesting, tasty snacks in your mailbox?

If so, you should try Graze. It's a snack company that will send you a box of four individually and attractively packaged snacks twice a month. I tried Graze after hearing an ad for it on Spotify and using a promo code to get my first box free. At the end of this post, you'll find a promo code so you can try Graze free, too.

I am a frugal person, and assumed that I would cancel after I got my first box for free, but I liked it so much that I've remained a subscriber. Here's what I like about Graze.

For $6.99 either once a week or once every two weeks (delivery is free), you'll get a box of surprise snacks in your mailbox. You don't have to sign for it and, while you don't get to pick your snacks, the surprise is part of the fun.

However, you can tell Graze what not to send you, so if you have an allergy, are on a diet, or just don't like, say, nuts, you can tell Graze that you don't want to get these items in your snack box.

Speaking of diets, if you're thinking that snack foods like dried fruit and nuts are calorically dense and not the type of food you want to eat a lot of, Graze has a solution for that: You can sign up for the calorie-counter box subscription. With the calorie-counter boxes, you won't get any snacks that exceed 150 calories. Plus, since the snacks are individually packaged, they offer a greater level of portion control.

Why do I like Graze so much even though I could seemingly get the same thing for a fraction of the cost by buying a few bags of dried fruit and nuts at the store?

1. The affordable luxury factor. Yes, $6.99 is a lot to pay for about 4 ounces of snacks. But it's a fun surprise in my mailbox every two weeks for a low price.

2. The uniqueness factor. Graze puts together interesting combinations that I wouldn't think of on my own, like the amaretti drops, raspberry-infused cranberries, almond slices and coconut flakes that make up the raspberry and coconut muffin snack. Even if I could think of this combination on my own, I don't know where, or even if, I can buy amaretti drops at the store.

3. The convenience factor. I can grab one of my Graze snacks on my way out the door if it's been one of those days where I've been so busy that I accidentally skipped a meal. They're also great to take hiking and on the airplane.

If you'd like to try Graze, you can get your first and fifth boxes free if you use the coupon code below. I get a free box if three people use my referral code, and then $1 for each referral thereafter.

Graze Coupon Code / Graze Promo Code: AMYF57G5B

How to borrow money to fix up a house

Kevin Quinn's 1866 home, before restoration
Have you ever been watching an episode of House Hunters where a young couple with a modest homebuying budget finds a fixer upper that's under budget and says they can use the savings to repair the house?

I've always wondered where they get that money from, since they probably barely have enough money for a down payment. Where would they find the cash to fix the hideous kitchen and the outdated bathrooms, or to replace the dingy carpet with gorgeous hardwood floors?

While House Hunters doesn't get into the details of homebuyers' finances, there are home loans available that will help you finance a fixer upper, and I've written about two of them for Interest.com.

Kevin Quinn, owner of Bartlett Home Improvement in Memphis, used one of these loans to fix up a house that was in such bad condition that he was repeatedly urged to tear it down and start over.

But he's a big believer in historic preservation, and wanted to restore a crumbling 1866 house.

The before and after photos you see here show what home renovation loans make possible.
Kevin Quinn's 1866 home, after restoration

If you're interested in buying a fixer upper, too, but don't have enough cash to make both a down payment and all the improvements, you can get the details on how these loans work and how Kevin used a renovation mortgage in my Interest.com article, How to finance a fixer-upper.

How to Get the Best Value on Grocery Store Meat

The best way to stretch your grocery budget when buying meat is to buy inexpensive cuts like bone-in, skin-on chicken thighs and tough cuts of beef and pork that you simmer in the slow cooker for hours.

At least, that's what I thought. I was wrong.

After months of blowing our grocery budget, I decided it was time to get back on track to my goal of spending just $285 a month. (If this sounds really low, it's because we go out to eat a few times a week.)

The best way to stretch the budget for two people who like to eat meat at almost every meal turns out to be purchasing boneless, skinless chicken breasts on sale.

You'd never think that a cut of meat that requires more labor--someone, or some machine, has to butcher the bird, remove the bones, remove the skin, and trim off lots of fat and gristle--would be the most economical. But I've found this to be true.

A local, low-budget grocery store puts this cut on sale for $1.59 a pound every few weeks, and we stock up then. We cut all the unsavory parts that remain off the breasts, which takes about 40 minutes for 12 pounds of similar sized cuts of meat that will cook in roughly equal amounts of time. We then freeze them in bags containing 1.5 pounds each, since that's how much we like to cook at one time. Cooking weeknight dinners becomes really convenient, because we now have premium, perfectly trimmed pieces of meat at a fraction of the cost.

But the trimming process leaves about 1-2 pounds of fat with pieces of meat mixed in. We used to toss this out, figuring that we were still coming out ahead overall, and that the time it would take to cut the meat more precisely wasn't worth it (the 80/20 principle). But I've discovered that I can toss all of the scraps into a crock pot on low for a few hours, melt the fat away, and be left with mostly usable scraps of chicken breast that are great for mixing with a sauce or putting in omelets, quesadillas, enchiladas, or any other dish that's good with small pieces of meat. I still lose whatever I paid per pound for the chicken fat, but I lose less than 10% of what I purchased, or about 16 cents per pound.

Bone-in, skin-on chicken legs, on the other hand, cost me 69 cents a pound on sale, and I lose a whopping two-thirds of that in bones, fat, gristle and skin that gets thrown out (maybe you like to use some of these things for stock, but I don't). I have a kitchen scale, so I actually did the math--I'm not just eyeballing it. That means I'm effectively paying $2.10 to get one pound of useable meat, still doing plenty of labor to separate out the edible meat, and getting a less healthy product (though dark meat simmered in its own fat in a slow cooker certainly is tasty!). The same goes for pork shoulder, which might cost $1.69 a pound and similarly loses 2/3 of its weight after subtracting skin, bones and fat.

Would it be cheaper to eat rice and beans, or quinoa, or other vegetable sources of protein? Maybe. But we like meat, so we find ways to make it as affordable as possible.

Photo: quiddle

Don't get stuck with a tough-to-sell condo

Photo: The Pug Father

Condos are great if you don't want the maintenance hassles of a single family home. They can also be a more affordable option.

But condo life isn't part of most people's long-term home ownership plans. The National Association of Homebuilders says that more than half of condo owners move within six years of purchase.

If you're shopping for a condo, you'd be wise to think about its resale potential before you buy. Do you know which floors, bedroom counts and layouts are the most desirable? Which amenities buyers care about most? Which locations within the condo building your should avoid? My new Interest.com article, Don't get stuck with a tough-to-sell condo, has answers to these questions and more tips for making the best condo-buying decision.