You have to grab business opportunities that are available to you, whether you think it’s hard or unattainable. Some of those are PMI, refinancing, and loan to value. How do these all work? In this episode, David Sidoni dives into an article about PMI and refinancing, telling tales of success stories from first-time buyers. However, this is not just an education on how they used PMI and refinancing techniques to drop hundreds of their payments; it’s also a warning that these dream scenarios were once in a generation. Should that discourage you from buying a home? No, but David opens your eyes a bit to the reality of using PMI sensibly. He discusses how counting on refinancing may not be an option if you already get a historically low rate – be prepared and know the numbers, and then make this move confidently. People got good things out of it, but make sure you understand how this all works, so tune into this episode!
Ep. 54 – Deep Dive On PMI And Refinancing – Planning For The Future As A Homeowner
First Time Home Buyer Tips And Tricks For Understanding How The Mortgage Process Works
What is PMI, refinancing and loan to value? How does this all work? It’s really exciting in 2021, and a lot of people have gotten a lot of good things out of it, but moving forward, you are going to make sure you understand how this all works. Let’s get into it.
What I’m going to do is something a little bit different. I just finished a podcast and popped open my computer and found an article from September 2nd, 2021. If you’re reading in the future, everything I’m telling you is going to be different, but some of the foundations are still going to be the same. This is from the Orange County Registrar, written by Jeff Lazerson. I live in Orange County, California. I’m going to do something totally different. I’m just going to read this article and then interrupt myself and help explain this to you.
There are some things that happened in the last few years that are super exciting. I’m always hearing, I’m always positive, but you guys know I did a whole show about a potential recession, which is still coming. This is so that you don’t think I’m just sitting here trying to blow sunshine. I want you guys to understand there are some exciting things that happened, but a lot of them already happened.
The big, sexy and fun stuff in buying a house, all the cool non-horror stories, all the great, sexy and fun stories, some of that fast appreciation, fast price increases and the great refinancing, a lot of that stuff is not going to be the same in the future. Make sure that you understand everything. What I’m going to do is I’m going to give you guys this article and then explain some of it as we go along.
We won’t use the person’s name, but there was one client who doubled down and bought a place in 2018, and by 2021, they ended up saving $800 in their monthly payment. How do they do that? Interest rates dropped from 2018 to 2021, and they also had an opportunity to lose the PMI. When the rates dropped, they did a refinance.
They paid $375,000 in 2018. In 2019, the rates went down and this person was able to knock $400 off their monthly payment. A lot of people took advantage of that. That’s a great thing to do. That’s where you have to realize right now, everyone’s going to tell you, “Just buy now, and then you can refinance later.” Except for the fact that January 15th or 16th, 2021, was the lowest interest rate in the history of mankind. If you’re buying something right now and you’re around 3%, I don’t know if it’s ever going to drop below 3% ever again. Maybe just instead of thinking about, “I can’t wait until this lower,” how about thinking, “I’m so excited at 3% that I get to hold this for 30 years.”
This person bought it for $375,000. 2019, they dropped it down to $400. In 2021, they had a new appraisal for their property. Originally paid $375,000, the new appraisal was at $440,000. He went in and knocked another 1.25% off the interest rate because they got that one refinance in 2019, but they got a better one in 2021. January 15th or 16th had the lowest interest rate in the history of mankind, 2.55% or 2.66%.
It’s so low that they got another chance to take $400. They knocked 1.25% off the interest rate. That new property appraisal at $440,000 also meant that even though they put less than 20% down when they originally bought the house, now the house has enough equity that the house had more than 20% equity. He goes back to the bank and goes, “Thanks for the low-interest rate, and I have more than 20% equity in my house.” Let’s get rid of your monthly mortgage insurance bill, your PMI. Another $139 a month is gone.
What is that insurance and why do some borrowers have to pay for it? Jeff Lazerson explains it, and I’ve explained this to you before, but here is what he has to say. “PMI is required for loans sold to mortgage giants, Fannie Mae and Freddie Mac, that do not have at least 20% down or 20% equity in the case of refinance transactions.”
The way that works is they’re just thinking about, “What happens if this guy gets hit by a bus or what if he loses his job and forecloses on the house?” We want to protect ourselves. Every month, you pay us a little bit of insurance. It’s like your car and health insurance. You pay him, even though nothing happened, just in case something does.
Some people pay this upfront. It’s a whole big charge you can pay right at the beginning. It’s called a lender-paid premium. That means it’s going to be inside your mortgage rates. You are going to have a little bit of a higher mortgage rate, but you don’t have to pay it every month. You don’t pay an individual payment, but your payment’s higher because your rates are higher. See how that works? That’s the reason I’m explaining this to you.
Here’s a big thing about mortgage insurance. It is based on your FICO scores, your credit scores. It’s your middle credit score, not your average, not your all three combined and divide it by three, whatever your middle credit score is. That mortgage insurance, right now it’s really low if you’ve got decent credit. For example, if you put 10% down on a $400,000 mortgage and your credit score is 740, your monthly premium on the PMI is about $97. That same loan with a 620 credit score, that’s $407.
If you had no clue where to start and you’re just beginning and you’re brave enough to be listening to all this mumbo jumbo, guess what I think you should work on first while you’re working on your savings? Credit score. If you want to use the PMI and you want to use a low downpayment, that credit score is crucial to keep your PMI payment low.
If you’re buying it at 3.5% down, which a lot of people do on an FHA mortgage, I want to remind you that in the last couple of years, the average downpayment is 6% for first-time home buyers. It’s not 20%. Most of them are using 3.5% or 5% down, and then some of them are using their inheritance or they’re crazy like my gal Madison from a few episodes ago, who’s been saving since she was fourteen years old, but even she decided to use 5% and work this PMI magic.
In 1998, the Homeowners Protection Act mandated that PMI is removed when you reach 80% of the original value, that means you got 20% equity in the property. There are a couple of things with PMI. Jeff mentions the fact that also, if you’ve got good payment history and there are no seconds, no other liens on the property, then you can shed the payment with two years of on-time payments and 25% equity.
What they’re talking about right here, I want you guys to realize I’m not here blowing smoke. I’m telling you and Jeff pointed out too. In this market, he says in scorching of appreciation, a lot of people think, “I’m just going to buy a house, and then when it goes up, I’ll get rid of the mortgage insurance so I’ll really be able to afford this.” It’s going to cost us an extra $97 a month for a little while, but that will go away.
Be careful because I had friends in 2003 and 2004 who bought houses and saw their house double. I had other friends in 2005 and 2006 said, “I’ll just buy now, and it’s going to double in a couple of years and then I’ll refinance or I’ll sell it.” 2007 came along and their house stopped, and then 2008 came along and their house plummeted.
I’m not saying that’s what’s going to happen right now, but when you read these articles, remember much of what you’re hearing people do. That guy at the beginning, who bought in 2018 and his payment dropped $800 by 2021, was absolutely someone who benefited from the exact time period that he was out there doing this. He got scorching appreciation. He got super-low interest rates.
January was the lowest interest rate ever in 2021, and in the summer of 2021 nationwide, we gained 19% from the year before. Usually, we gain about 3%. Take a little time. Let that all sink in. I’m telling you, don’t believe the hype. Make sure you understand when you’re buying your home how much and how long you’re going to have to pay that PMI and make sure you can do it. If you understand it and you think, “Maybe I’ll have to pay this for 5 or 7 years,” Great. Most of you might be young and are expecting some salary increases. Work with it.
Here’s a story of someone else. This person didn’t plan on it, but this is what they got. This person bought for $483,500 in Laguna Niguel, putting just 5% down. Her place, since she bought it, has gone up to $56,000. Huge, and that’s in just eight months. That’s gigantic. The thing to remember is that’s great, but she’s at 15% equity and that’s not enough to eliminate her PMI.
If she could do that, she’d be able to drop $84 a month. This person says, “I’m frustrated, but at the same time, I feel lucky.” I want to reach into my computer and smack that person in the face. What else have you done in your life to this point that you pay an extra $84 a month for it, but in eight months, you made $56,500? That’s what I’m talking about.
Can you all have the beautiful, happy ending like the first guy did at the beginning of the story? Probably not because we’re not going to see 19% from 2021 to 2022. What are we going to see? Jump back to my episode where I talk about the forecast from all the economic people, and we’re probably going up anywhere from, maybe 10% and then 3% and 4% for the next couple of years.
If you buy now and you get 3% or 4% for the next couple of years, but you only put 3.5% down, you’re not going to be at 20%, but you will be a homeowner, and you will be paying yourself instead of paying a landlord. You will be at 12% or 15% pretty soon, and eventually, you’re going to get to that place if you do like Madison does, and you follow some of the double payment techniques on your mortgage every once in a while, you’ll be able to get rid of that fast.
Understanding the fact that you’re going to be able to refinance if the rates ever go down again. It sounds great, but I’m not going to be sunshine and lollipops all the time. I don’t know if you’re going to be able to refinance. Go and learn the numbers, believe in the numbers, and realize that even a home with PMI at low-interest rates may be a better deal for you than trying to rent to save up to 20% to eliminate that PMI. I talked in Madison’s episode last time about putting 5% down if you have 10% down or 20% down and just putting 5% down, and then save the rest in a bank account. You suck into that bank account every time that the mortgage payment each month gets a little too sketchy for you.
Know that when you read these stories, the stories you’re going to be reading right now are going to be the stories that happened from ’17, ’18, ’20 and ’21, but that’s not going to happen again. Everything has to go up and down. This has to slow down at some point, and it’s going to, so because of that, you need to understand all your numbers need to be stoked about it.
What I’m telling you is your story is not going to be as exciting as this one is. Could you do some creative things and find some things and get something more exciting? Yes, but if you’re doing this because you heard about the giant in California. I think they’re talking about from 2018 in California. It was up 26%. If you’re trying to catch 7% or 8% a year when the average is 3% or 4% a year, that’s probably not going to happen. We’re going to slow down. Your story is going to be, “I had some money in the bank, and my grandma gave me $10,000. My rent was $2,000, but because interest rates are so low, I realized I could be a homeowner for $2,200 a month. Yes, $2,000 more than when I was renting, but I own it.”
It’s hard because you think, “Just 2% or 3% a year, but what if you own it? $2,000 could buy you a $400,000 place. What’s 2% or 3% on that?” That’s a lot of money for just paying your rent. This is where I get very excited. Even when the numbers are slow and going against you, which I’m telling you this because I want you guys to be fully informed. I don’t want you guys to get sucked into clickbait.
These types of crazy PMI deals, they’re not going to happen, but what if you’re paying PMI on a place, but you’re also gaining 3%, 4%, 5% on a $400,000 place for the next three years? You have to keep paying the PMI, but if you’re getting 5%, you’re going to be getting $20,000 a year in equity. If you’re only getting 3%, you’re going to be getting $12,000 a year in equity.
As a homeowner, you have so many more choices. It doesn’t matter if you make a ton of money when you own a house or a little bit of money when you own a house. The statistics are out there. It’s like homeowners are somewhere between 45 and 50 times wealthier than renters. There’s a reason for that. You have a forced savings account. You’re putting your money in there. You’re paying yourself and that money is growing.
That was a little just straight off the dome me reading an article. This is crazy. I’m reading the end of this article right here and it’s talking about getting FHA loans at 2.25%. That is insane. That’s so low. That’s if you’re paying a point. Paying a point will be the last little thing I’ll tell you about. If you pay it point on a loan, that means you’re paying upfront to lower your rate. Most first-time buyers, if I’m scraping up 3.5% and 5%, I’m not going to pay my rate down. This is why I’m saying this so you can do something sexy that people don’t understand, but it’s super awesome.
What if you realize that PMI is no big deal and you can handle it and you’ve got 10% down, but you’ve put 5% down and the PMI is nothing, you can handle it? You think, “I want to pay down my loan a point because I don’t think it’s ever going to get to 2.25%, so I won’t be able to refinance. Let’s put 5% down instead of 10% down and let’s pay $5,000, $6,000, $7,000, $8,000 to pay down the loan interest rate.”
You can do that at the top when you buy and lock into that for the rest of the 30 years. That is obviously more money upfront. If you end up putting less down, you’ll have a little bit of a higher payment, but you’re going to have that interest rate forever. These are all the things that can get convoluted, but it’s things that you should think about when you’re a first-time buyer.
If you don’t care and you’re like, “I just want to get into it,” cool. Make sure that your team understands exactly what you want and what you don’t want. That’s why I always say, “Talk to yourself, find yourself a unicorn, find a unicorn lender from your unicorn realtor and together, they’re going to help work on your specific plan.”
If you’ve got questions about that, you’re looking for a unicorn yourself, that’s me, David Sidoni, the How to Buy a Home guy. DM me, look me up, @DavidSidoni or How to Buy a Home on Instagram. Facebook, you can find me there. There’s a Facebook group. You can message me. You can Twitter. I don’t do Twitter very much. I do TikTok, but that’s mostly just because I like being an idiot.
The other thing to do is go straight to DavidSidoni.com or HowToBuyAHome.com and then send me an email. Why do I ask you guys to do this? Why do I tell you to do this? It’s because the real estate industry is broken. I’ve been working hard to find the right people out there who can help you and explain this stuff to you and care about you. I’m working from the inside out.
I’m like that mole trying to change the system. Sooner or later, it’s going to happen. Send me a message. Say, “I need someone in Denver.” I have someone to do that and it’s someone in Denver. Awesome. I got some people. We’ll take of you. That way, we can continue to grow this revolution so that you can learn about all this exciting stuff.
Isn’t my life thrilling? PMI, refinancing and interest rates. It’s lame, but let somebody who loves the lame stuff lead you. You can then do what you want to do for fun and know that somewhere, when you go home and rest your head on your pillow, that roof above your head is a stable, financial future for you and your family. How’s that for cheesing it up right at the end? You know the drill. I believe in you. Ted Lasso believes in you and you can do this.
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This podcast was started for YOU, to demystify things for first time home buyers, and help crush the confusion. After helping first timers for over 13 years, I knew there wasn’t t a lot of clear, tangible, useable information out there on the internet, so I started this podcast. Help me spread the word to other people just like you, dying for answers. Tell your friends, family, and perhaps that random neighbor you REALLY want to move out about How to Buy a Home! A really easy way is to hit the share button and text it to your friends. Go for it, help someone out. And if you’re not already a regular listener, subscribe and get constant updates on the market. If you are a regular and learned something, help me help others – give the show a quick review in Apple Podcasts or wherever you get your podcasts, or write a review on Spotify. Let’s change the way the real estate industry treats you first time buyers, one buyer at a time, starting with you – and make sure your favorite people don’t get screwed by going into this HUGE step blind and confused. Viva la Unicorn Revolution!