Why PMI Sucks: A Letter
A friend of mine who lives in California wrote up a rant on PMI this morning. It was so telling that I felt compelled to re-post it here on BP. PMI may help buyers get into a home, but in the long run, it’s a sour proposition. Here’s my friend’s letter:
Personal Mortgage Insurance (PMI) is totally stupid. As it stands, people who can’t pay 20% down on a home loan are penalized for not having enough stockpiled cash and required to pay PMI ($200/month in our case), money that does not go toward principle and can’t be written off when you supposedly make “too much” as this support article defines.
Granted, homes in California are not cheap, my wife and I managed to pull together 12% which was awesome but still 8% shy of avoiding PMI. Despite 800+ credit scores and stable jobs, this is the third year that we have paid $2,500 in PMI. Each year, I think about how this chunk of our taxed income hasn’t gone toward our debt and how we don’t “qualify” to use it as a write-off. Yet it’s mandated by the government to bail out banks when they take bad risks.
The logic for PMI is this–
Bank: “Hey, if you don’t have 20% to buy a home, don’t sweat it, we’ll still loan you money (never mind that the government gave a large portion to us without interest). But the big bad government (with the help of our legislation writing team and lobbyists) requires you to pay a poor-person’s fee called PMI that they put in an emergency fund in case we, the banks, decide to be totally unethical again (preying on people who will be way over their heads so we can create money from nothing by inflating a market, collect a mortgage that is 2-5 times the going rent, evict when they can’t pay, then repeat with their repo’d property). Don’t worry though, you can write it off … that is, unless you make enough to actually pay your mortgage, muahahaha!”
Per our policy, PMI doesn’t stop automatically at 20%, rather at 22% (that 2% comes out to $10k on a $500k loan). If you actually want to stop paying your PMI at 20%, you get to pay an assessor a few hundred dollars to prove that you actually reached 20% (since banks are only good at percentages when they want to be).
It’s such a rigged deck with “former” bank employees writing the rules. Someone needs to get the memo to the people in DC who want a better country/world that if you want people to pay their mortgages, put some teeth behind laws against predatory lending to stop banks from running real estate rackets. Once that’s done, if the government wants to do something benevolent like allow middle class folks to purchase primary residences, don’t give interest-free money to banks. It reeks of crony nepotism – put that money into a government program set for the purpose. You’ll have extreme pundits and blowhards screaming “socialism” but at least there won’t be a real estate bubble with severe economic consequences across the globe and my $200/month won’t be putting out the unnecessary fires the banks create in the win/win game they’ve been designing over the decades.