I don’t understand how making me pay an extra 500$ a month makes me MORE likely to not default on my loan. I live in Southern California and to put 10% down on a house it costs like 170k at least. Anyways I’d love to know why it’s mandatory I pay PMI.
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Are you trying to tell me that you can’t find a house in socal that costs less than $1.7M? I’m calling BS on that.
It’s not about making you less likely to default on the loan.
It’s an insurance policy for your *lender*. If you default, the insurance pays *them* to cover some or all of the money they lost when you defaulted. Because you would like to buy a house, one of their terms is that YOU pay for the insurance, not them.
Generally there are ways to avoid it and get out of it. For example, if I had put 20% down, I would not have had to pay PMI, and when my principal is below 20% of the original loan value I will stop paying towards PMI. There can be other terms based on your creditworthiness, down payment, amount of the mortgage, etc. It’s probably also cheaper or more expensive for different people based on lots of those factors.
The bank is taking on a risk when lending out more than 80% of the home’s value. So they make YOU pay for insurance to cover that risk. If you default, that insurance covers the bank. That’s PMI.
PMI is an insurance policy against a borrower ‘s default resulting in a loss to the bank.
If your down payment is small enough and you default early, even after foreclosure the bank may not recover the entire balance owed. That’s where PMI pays.
Its not to keep you from defaulting. It is to make it so it won’t hurt the lender if you do default.
It has nothing to do with the odds of you defaulting and everything to do with the odds your property might auction for less than you owe.
The “I” stands for Insurance. You’re paying an insurance premium on a policy that a third party has sold to your bank that pays off if you default. This defrays the bank’s risk and allows them to lend to more risky buyers – Namely those with less than 20% equity in the home
How expensive is your house that your PMI is $500? I think mine is like $50.
Like others’ have said, it’s insurance the bank wants but, has you pay for. Did you know that businesses are, and have been, normalizing the concept of having other people pay THEIR business expenses?
Here’s another example. Do you use multi-factor authentication and work TO.DO.YOUR.JOB? Do you use a cell phone to do it? Whose cell phone do you use? Interesting, huh?
>Anyways I’d love to know why it’s mandatory I pay PMI.
Echoing everyone else here; but the additional kicker is – if PMI didn’t exist, borrowers who put 10% down would be required to:
1. Put 20% down; or
2. Be offered a loan with a (significantly?) higher interest rate to compensate for the increased risk; or
3. Not be offered a loan at all
You only have to pay PMI if you don’t know which side of the number the dollar sign goes on.
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