PMI: The Shadow Debt

Lately I’ve been thinking about my next moves after becoming debt free (minus the house), and I’ve pretty well settled it that I will first save as much cash as I can until the end of 2012 in preparation for a career transition.  

pmi debt

After that money is saved and my fate is settled, I’ll be looking to do some investing for retirement through a Roth IRA, as well as start a targeted savings account for replacing our paid-for vehicles.

While I don’t want to get very aggressive in paying off our mortgage, I have become tired of paying $100 per month in PMI, or private mortgage insurance.

What is PMI? Basically it is an insurance policy (sometimes called lenders mortgage insurance) that you pay for that benefits someone else. What is being insured against are lender losses above and beyond what is recoverable during foreclosure. Generally those who borrow more than 80% of a home’s value are required to carry it.

Once you owe less than 80%, the lender is sufficiently satisfied that you have a good commitment to staying in the home, and have paid them enough to satisfy their money lust.


Is PMI a Debt?

As I thought more and more about it, I began to wonder if PMI is actually a debt. An even bigger question, is insurance considered debt?

By the classic definition, a debt is a sum of money that you have either borrowed, or otherwise is owed, to another. This would be like an auto loan (money you borrowed), or medical bills (money owed for a service).

Is PMI something you borrowed? Technically, no. The mortgage is the debt, and PMI is the insurance on the debt. In our case, we consider insurance, just like our homeowner’s insurance, to be a cost of ownership, much like your electric bill is part of the cost of owning a home.

But PMI is a little bit different than homeowner’s insurance because we can easily get rid of it (please read “easily” as a relative term, as compared to homeowner’s insurance, which is a lot harder to get rid of). To get rid of the need for homeowner’s insurance, we basically need to save up a huge lump sum of cash to self insure, probably an amount larger than the value of the house (because we can’t forget about what happens if someone breaks their neck on our icy porch).

Because we can get rid of PMI by attacking it LIKE a debt, let’s just call it a shadow debt. That means it’s not a debt, but worse. It’s like paying monthly debt service for a loan you NEVER received. It’s essentially a penalty.

Or we could look at it this way: Even though you got a home loan at 4%, the amount you pay on that first 20% of that loan is higher since the PMI is essentially a cost of “owning” the loan. To find out the true total dollar amount it is going to cost you, you have to look at your amortization schedule that was provided when you got your loan. This will show you how many YEARS it will take you to pay off your PMI “debt” if you just pay the minimum mortgage payment.

That’s right. It will take you years and many thousands of dollars before you can start saving the typical $55/month per $100,000 financed.


“Debt” Must be Destroyed

So now that I’ve started thinking of PMI as a shadow debt, I feel my inner caveman voice saying “MUST DESTROY.” That means that next year I’ll probably task myself with the mission of getting rid of PMI.

I probably won’t attack it with the intensity that I did consumer debt (because if you are fighting shadows, people think you are crazy). In all honesty, it will likely take 1.5 to two years to get rid of it, because by my rough estimation, we owe about $15,000 to get our house to 80% paid off.

At $1000 per month, that is still 15 MONTHS before it is dead. This is starting to look more like zombie shadow debt to me.


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46 thoughts on “PMI: The Shadow Debt

  1. I’ve been wary of PMI as I think about buying my first home. I fully intend to avoid that fee by putting down a large enough down payment. As a result I’m blowing more money on renting an apartment though. So there definitely is a trade off for waiting to save that much. Good luck taking care of that penalty John.
    Modest Money recently posted..Putting Your Health Before Your FinancesMy Profile

  2. Ugh. PMI. When we went for preapproval at the bank, they were telling us that it would be almost $20K (which would be mortgaged) if we had 5% down just for PMI – that’s astronomical. I think they said it would be like $12K for 10% down and 5K for 20% down – I could be getting that wrong but I do know that even with 20% down here, you can’t avoid it.

    It’s a money grab.
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    • I think it automatically comes off when you get PAST 80%, maybe to 78%. Either way it’s a ton of money that is too easy to forget about. It’s hard to believe banks are hurting so much when they get that extra money.

  3. John,

    I think the PMI is worth it in order for someone to get into buying their first home. I paid roughly $4,500 when I purchased my condo 3 yrs ago. Was it worth it? Every penny. Could I have waited? Yes, but I’m unsure I would have became a homeowner today. So much has changed in the past 3yrs.
    Eddie recently posted..5 Full Proof Ways To Beat Rising Gas PricesMy Profile

    • Thanks Emily. I didn’t want to think of it that way because it will now bother me even more until it’s gone. Glad you stopped by!

  4. Ugh, yes. I had over $8000 tacked onto my mortgage when I bought my place. My goal is to have it paid off by the time my mortgage gets renewed in 2.5 years. Good luck paying yours down!
    Cassie recently posted..It’s Here!My Profile

    • I’m thinking of working for myself as a lobbyist, mainly because it’s fairly easy and lucrative. I could go crazy though and completely ditch my field of expertise. Big changes on the way for 2013!

    • That’s a good way to look at it. You could probably put that money into some peer to peer lending and get a better return. Hopefully home values go up again.

      Thanks for reading!

  5. Calling PMI shadow debt is an accurate description. It’s debt that’s not quite debt, but has the feel of debt, and is based on liability. It sucks to have it, but for many people it’s a necessary evil. If you don’t have the 80% down payment, then you’re essentially punished with PMI. I understand it, but it doesn’t quite sit well with me.
    Anthony Thompson recently posted..Self Manager – Success Habits You Should’ve Mastered Before Finishing High SchoolMy Profile

    • Thanks Anthony. It’s definitely a punitive fee. That’s the price we pay, I guess, to have the opportunity to get such large loans.

    • Yep – probably the number one reason is not having the money! At least it was for us. If I had things to do over I’d try to save the 20%, but then again the only way I am in the position to do that is by spending my money elsewhere. Definitely a double edged sword.

      Thanks for your comment!

  6. I can’t stand paying PMI. It’s money that isn’t doing anything for me, other than allowing me to own a home with less than 20% down. If we could do it again I think we would of saved up a 20% downpayment before buying. If our refi goes through it won’t matter because with a VA loan PMI isn’t needed. Good luck on paying yours down quickly to get rid of the PMI.
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  7. “Shadow debt” — I like the term. And I think it SUCKS! I get why lenders do it, but it’s just like more and more money getting ripped from our pockets. Ugh. I hope you can get out from under that shadow on the timeline you want! And if not, dont’ worry, you’ll get there and we’ll all be rootin’ you on 🙂
    TB at BlueCollarWorkman recently posted..Getting StiffedMy Profile

  8. I remember first reading about PMI when we started thinking about buying a condo 2 years ago. We saved so aggressively just to save more than 20% down. Now that we finally have our down payment, we keep getting beaten out by investors!

    When we were looking almost 1.5 years ago, I bet that we would have found a place. There have been so many that I saw while we were saving up for 20% that we missed out on. So there’s the opportunity cost that factors in since we decided to avoid PMI completely. Since I missed out, I’m not sure how much we missed out on…what if we could have had our dream condo?? Haha oh well… just something to think about if someone sees their dream home, but doesn’t want to move forward because of PMI. We calculated how much we’d save if we had 20% down and at the time we were satisfied with our decision.
    From Shopping to Saving recently posted..PF Link Love: Fave Reads of the Week and Life UpdatesMy Profile

  9. “Shadow debt”, I like that! I hadn’t thought of it that way but that is a good perspective to see it in. For VA loans we don’t have to have PMI, but for many of my friends with PMI I know what a pain it is. I didn’t know it was 80%. Thanks for putting the actual figure.

    Last year I started with a Roth IRA and absolutely love it. I get to pick my own investments, normally INDEX funds or Target Retirement Funds.
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  10. In order to avoid PMI, we took out a line of credit. The line of credit is a variable rate however; the rates right now are very low. The low rate combined with the tax deduction that we can take on the interest we felt was a good trade off. It has saved us over $600 per year and will be paid off soon. The trick is to be consistent about paying it off. If you are not structured about it, it could cost more than PMI (assuming you don’t pay principle and the rate goes up). Also, it is trading “shadow” debt with real debt.
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  11. I think a PMI could be considered a debt. Or like you said, worse. I get the point of the PMI but my goodness $100 a month seems a bit much to me.

  12. I think there is a creative way to get rid of PMI. If you have excellent credit then you can get HELOC. Use that money to pay down more than 20%. You will shoot two birds at the same time by paying off PMI and get interest write off for the HELOC loan.
    Shilpan recently posted..What’s Your American Dream?My Profile

  13. We ended up getting an 80/15 mortgage when we bough our house to avoid the PMi shadow debt..

    I hated having the two payments, and we just recently combined the two during a refinance, but I still think it was the right decision.

    Paying PMI always felt like “money for nothin”
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  14. PMI is so frustrating! We are underwater at the moment, so it looks like we’ll hit the 5 year mark before PMI will be gone. Our lender said it’s the shorter of getting to 80% LTV or 5 years. I hate paying for someone else’s insurance. Though I don’t regret purchasing the home, we definitely will avaoid PMI for any future purchases.

    Also, congrats on getting out of debt, that’s a huge milestone that I hope to hit soon as well!
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  15. My brother in law is a lobbyist. Let me know if you’d like to talk to him.

    When you decide what intensity to pay down PMI, I like looking at the money as interest on a debt. So, if it’s a 20 percent debt, I’ll treat it as a 20 percent credit card. If it’s a 4 percent debt…I don’t care nearly as much.
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  16. When I worked in mortgage, even mortgage professionals advised buyers to do anything they could to avoid PMI. It doesn’t benefit the buyer in any way. I like your lablel of “shadow debt” — very fitting!

  17. In my experience, the PMI doesn’t go away automatically after you cross the 80% threshold. You have to ask/request that it be removed. At least that is what I had to do years ago.

    It may not take you as long as you think. Home values should make a turn around and will hopefully start rising again. Slowly but surely it is happening. If you suspect your value may have gone up enough to get rid of PMI, it might be worth spending a few hundred bucks on an appraisal in order to prove it to the lender so you can dump that PMI!
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  18. That’s why – as my husband and I evaluate potential home loans – we’re really focusing on the APR, not just the interest rate. PMI sucks, but there are ways to avoid it – we found a regional bank that doesn’t even *do* PMI. All borrowers must have a credit score about 725, put down at least 10%, and have a front-end DTI ratio at or below 28%.
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  19. Very interesting choice of words.
    Dear wife and I never wanted to pay that insurance, and literally did everything we could to not pay PMI. That included moving in with my in-laws for 9 months, and me taking a second job, before our house was built for us. We completely saved my wife’s income and part of mine to make sure that we had the 20% downpayment along with closing costs and some of the upgrades we did.
    We’ve been lucky to have bought at a good price and since we had the 20% down initially, it has not been an issue when we refinanced our mortgage several times.
    Like you, I am become very debt averse and am working on destroying the debt completely so we can put more money aside for building retirement whether it is early or later.

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