SWB: Alan B. Rowley II - Success Coach - ECoaching - Email Coaching

"Head or Gut?"

I will have to get to my post about gambling tomorrow.  I came across an article on pmi that begs my attention, especially since that's what I was talking about.  It's also about our best buddies in media.

"Santa Cruz, a consultant for a biotech company, said he and his wife Michelle were happy to sign up for PMI, which will cost them $150 a month, because it allowed them to get the kind of mortgage they wanted."

What kind of mortgage did they want?  A no money down mortgage.  I have no problem with that but it plays into this article so I thought you should know.

The other option offered to them was an 80/10/10.  We've talked about 80/20 loans and this is similar.  For those that don't know, you get a mortgage loan for 80%, a down payment loan for 10% which usually carries and interest rate of 2% higher than the mortgage, and you pay 10% down in cash. 

The Cruz's didn't have the 10% for their 4 bedroom, 2 bath, with a large yard, house.  It doesn't say what the price was so I'm just going to assign a value of $250,000 for this post.  The median price for a house in Tucson a couple of years ago was $200,000.  If their PMI rate is around 1% (it generally varies between .9% and 1.9%), then I'm pretty close to the mark since their PMI payment is $150.  I'm also going to give the Cruz's an interest rate of 6% for their mortgage.  I'm nice that way.

There's the background.  Let's talk about this quote and this article.

Insurance on a Secured Loan

I received a Private Mortgage Insurance Disclosure from my mortgage company the other day.  It's been a while since I've mentioned how much I detest PMI so I guess I owe them some thanks for reminding me about how they're screwing me.

PMI is paid to mortgage companies to fund their foreclosure costs if you default on the loan.  It's a fee levied against people who can't afford to pay 20% down on their house.  Yet another fee that makes it harder for people without money to become people who have money. 

If you do get your mortgage paid down to the 80% mark, you can request, in writing, to drop the PMI.  It's not automatic and they don't have to honor your request. 

In my case, they don't have to drop it if you've had any payments in the last 2 years that were 60 days late or any payments in the last year that were 30 days late.

Not only that but if they aren't ready to give up on the free money, they can make you get your house appraised to make sure that the house is still worth at least as much as it was when they made the loan.  You have to pay the appraisel costs of course. 

If I get my mortgage paid down to the 78% and am current on my payments, it's supposed to be automatically taken off.

I'm at the 97% level right now so that's a little ways off.  My goal for 2008 is to get rid of the PMI and to never, ever pay it again. 

PMI is a great thing for mortgage companies because the current trend is for people to move or refinance every few years.  People who refinance to get the equity out of their houses will never get their mortgage paid under 80%.  People who go for those interest only loans will never get their mortgage paid under 80%.  These people will always be paying more money for something that they will never own.  Crazy.

Interest, PMI and the sinister Refi

I have seen a pattern in the people around me play itself out several times.  It's a pattern that ensures their financial slavery.  The five year refinancing of their homes.  The trap has so many factors going against people that it is surprising that people do it...but they do and so we will discuss it here.  What's wrong with the 5 year refi?

1.  We have talked about what a complete waste of money PMI is.  When you keep your loan from going below the 80% mark, you are making sure that you are always paying PMI.  You can't continue to throw money away if you want to make money.  PMI is a gift from you to the bank.  Does that bother you at all?

2.  Do not ever be confused by the "great interest rate" that you are getting.  If you have a 6% interest rate, there is only one way to pay that amount of interest.  You have to pay off your house in one year.  If you don't, you are paying more than 6%.  The longer it takes, the more interest you are paying.  If you are going to pay for 30 years, then you are talking about something in the range of 180% interest (30 years X 6% a year).  Is there anyone out there that wants to pay 180% interest on anything?  But that's a discussion for another post.

What I want to get at is this.  Take your payment and subtract your PMI, your home insurance, and your taxes.  What is left is the amount of interest you are paying.  What you will see is that each month, you are paying something in the area of 80% interest in your first few years.

Everytime you refinance your house, you keep yourself paying this incredibly high amount of interest.  Think about it each time you make a payment.  80% of your payment is profit for the bank and doesn't help you.  Can you really afford to throw away 80% of your money?

3.  The last part of this trap is the icing these people put on their cake.  They do a refi so that they can pay off all their other bills that have accumulated over 5 years.  Pay off medical bills, pay off credit cards, and pay off the old car.  They now have a lower overall outgoing payment.  This can be good!  It really can, if used correctly.  It's not great but it can still be worked into a great thing.

But that's not what happens, is it?  Gee, now they have more money left over each month so what do they do?  Go buy a new car.  Run up the credit cards.  Live life like they make more money for a year or two and then what?  They try to hold out for a few years while the value of their house goes up so that they can get it refinanced and do it all again.

Each refinance doesn't get them ahead, it puts them further behind until there is little chance of ever achieving financial freedom.

Tomorrow:  Keeping up with the Joneses.

The Rich Get Richer, the Middle Class Get Poorer

In "America: Freedom to Fascism," there is a conspiracy theory about why this is going on.  I don't know about the finger pointing but I do know that there are two things that are true.  Poorer people are easier to control.  The middle class is shrinking with more people falling on the poor side of the line than the rich.

And there is no doubt that the system is set up to just this.

Everyone knows at some level that the system works this way but they fail to take that knowledge and put it into action.  My wife and I discuss these things and are working on our plan to fix things for ourselves.  Yesterday we were talking about Private Mortgage Insurance (PMI).  This falls into the plan of making the rich richer at the expense of everyone else.

For those of you that don't know, PMI is an extra fee that you pay to the bank if you can't come up with a 20% down payment for your house.  Most people today don't have 20% saved up for their house and so they end paying this extra fee.  You are giving money to the bank just because they have you by the short and curlies.  You either pay it or you don't get your house.

Sure you can get a loan for the 20% if you want.  Banks are always willing to give you an 80/20 deal.  The reason they do this is because you pay a higher interest rate on the 20% so they end up getting the extra money anyway.  They get richer while you throw money away.

The thing with PMI is that it isn't needed because your house is collateral on the loan.  You don't need insurance.  Your house is the insurance.  You either pay for the house or the bank kicks you out and sells it to get their money back.

Tomorrow, more on interest.