What is PMI and what should you do about it?

by Bob Snyder on April 24, 2014

If you are thinking about buying a home, one of the terms that you may have heard discussed is PMI, or Private Mortgage Insurance. Sometimes it may also be referred to as LMI, or Lender’s Mortgage Insurance.

So what is PMI?

PMI is insurance paid for by you that will cover any losses sustained by the bank if you fail to repay your loan.

The key point here is that it is insurance that you have to pay for but from which you don’t really receive any benefit.  It only benefits your lender as it protects them if you default on your loan.

Normally PMI is based on a percentage of the original loan amount and may vary from about .3% to 1.15% The size of your down payment can affect the percentage you pay as well.

Why pay PMI?

The idea behind PMI is that it covers the lender from any losses if you don’t repay. But your home you are buying is also providing collateral to cover the loan. If you don’t make your payments, the bank will eventually foreclose and then sell your home to cover the remaining balance on your loan.

So why do you need PMI if your home is providing collateral for the loan?

If you buy a $200,000 loan and put $75,000 down so you are only borrowing $125,000, you will not need to pay PMI. The bank is almost certain to be able to sell your $200,000 home for more than the $125,000 you owe. Their risk is very low.

But what if on the other hand, you only had a $10,000 down payment, so your loan was for $190,000? What if there is a downturn in home prices in your area like we saw in 2008 and your home value falls from $200,000 to $170,000? Now the bank has the potential to lose money if you don’t make your payments.

So, where is the point where you don’t have to worry about PMI? Generally speaking, if you make a down payment of at least 20% of your home’s current appraised value, you won’t have to pay PMI.

How to get rid of PMI?

If you have PMI currently on your mortgage, it may be possible to get rid of it.

The key is you need to pay your loan down sufficiently that your remaining balance is less than 78% of your mortgage. So if you had a mortgage on that $200,000 home we talked about earlier you would be eligible to have PMI removed once your remaining balance was $156,000 or less.

While you are eligible to have PMI removed, there is no guarantee your mortgage company will do it automatically. You may need to contact your mortgage company and request that it be removed. Be aware that in some cases your mortgage company may require you to get a new appraisal to show that you really do have enough equity.

If you live in an area where property values have done well and you think your home is now worth significantly more than it was when you purchased it, then this can work in your favor, since you won’t need to have your mortgage paid down quite as much.

Be aware that the rules for FHA loans changed last year. On some FHA loans, you are no longer allowed to remove PMI regardless of your balance. For these loans you may need to refinance to get rid of the PMI.

What to do about PMI?

PMI only protects your lender. You are essentially paying to benefit someone else. Kind of like offering to pay your neighbor’s car insurance. Your neighbor may think you are awesome, but it doesn’t help your finances any. You’d be much better off if that money you are spending on PMI were going to pay down your principal.

The best answer:

The best solution is to save until you can pay at least 20% or more down on your home. Or if you you don’t have 20% saved, look for a less expensive home that you can pay at least 20% down on. If you are able to make a down payment of at least 20% or more, you’ll never have to worry about paying down PMI.

If you already have PMI:

If it’s too late and you already have PMI, work as quickly as you can to get your loan paid down to where you can have PMI removed.

Once you believe you have paid the mortgage down enough to reach that 78% level, follow up with your lender and make sure it is removed.

If you don’t make a large down payment, you don’t have any choice whether to pay PMI. But just remember PMI benefits the lender not you. Every month you pay PMI, you are throwing away dollars you could be using to get your mortgage paid off.

What experience have you had with PMI? Tell us your story.

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How your tax dollars are spent

by Bob Snyder on April 22, 2014

Last week was tax day for those living in the United States as the deadline came and went for filing your 2013 tax returns. There has been much said and written about the merits of various government spending, and I’m not intending to debate that here with this article.

You may be wondering though exactly how your tax dollars are spent. The White House publishes an interesting little “tax payer receipt” page that allows you to get a relative idea of now much of your money goes toward various services.

Where did my tax dollars go?How your tax dollars are spent

The tool excludes social security and medicare taxes so services provided directly from those funds are not included in these totals. That said, the break down is as follows:

For each $100 in taxes you paid…

$25.19 – Healthcare

This includes programs like Medicaid and the Children’s Health Insurance Program (CHIP). It also includes Medicare payments to doctors not in addition to what is paid by Medicare taxes. And finally it includes all the programs related to drug and food safety, disease prevention and other healthcare related services.

$24.79 – National Defense

Of that total about $5.97 goes to salaries and benefits for our service men and women. $10.16 is spent in support of ongoing operations and the rest goes to research and development as well as other military activities.

$18.77 – Job and Family Security

This includes all of the various assistance programs related to unemployment, food, housing, disability, and other similar programs. Federal employee retirement programs are included in this total as well.

$5.44 – Veterans Benefits

Programs that support our military veterans.

$2.85 – Education and Job training

Includes programs that support our schools. Tuition assistance programs. Various employment training programs.

$2.06 – Immigration, Law Enforcement and Administration of Justice

Border protection as well as programs and agencies in support of enforcing the laws of the land.

$1.92 – Natural Resources, Energy, and Environment

Programs that protect our natural environment.

$.1.82 – International Affairs

Foreign assistance for humanitarian purposes. Embassies and foreign diplomats. Other programs related to our relations with other countries.

$1.15 – Agriculture

Programs that subsidize agricultural activities as well as research and development of new crops.

$1.13 – Science, Space and Technology Programs

NASA, the National Science Foundation, and other scientific research programs

$0.90 – Response to National Disasters

Direct assistance as well as small business loans to aid in recovery

$0.37 – Community, Area, and Regional Development

Programs that support our local communities

$4.89 – Other government programs

All the other miscellaneous programs

$8.64 – Interest

Interest on Treasury debt securities that finance our national debt.

As I said my purpose is not to debate the relative merits of these programs. What I do think is valuable is having a general understanding of where our money goes and the relative amounts.

If you want to see the specifics of exactly how much you “contributed” to each of these programs this past year, you can go to http://www.whitehouse.gov/2013-taxreceipt and enter your specific tax totals for a break down specific to your situation.

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Best of the week – April 19, 2014

by Bob Snyder on April 19, 2014

Here are some articles that caught my eye this week…

When ‘Liking’ a Brand Online Voids the Right to Sue

Interesting article. Essentially, General Mills and some other brands are instituting  a policy that if you print an online coupon for the product, like them on Facebook or other social media, you are forfeiting your right to sue them in the event there is an issue with their product. You would instead need to go through an arbitration process. I’m not sure what I think about this. I can certainly understand it in our litigation-happy culture. At the same time, it seems like a good way to upset your customers and open a potential land mine of bad PR. What do you think? Leave a comment below.

10 More Top Tips from Our Favorite Personal Finance Bloggers

Good advice on a variety of topics.

Four Simple Ways to Cut Household Expenses

A few minutes of your time could add some needed margin to your finances each month.

3 ways low prices are actually harming consumers

We all know the dangers of high inflation and the damage that can do to our wallet. Did you know though that low inflation rates or even deflation, which is falling prices, can be just as damaging? It may seem counter-intuitive that falling prices would be a bad thing, but a reasonable amount of inflation is actually a part of a healthy economy.

You’re Blocking Your Own Success — Here’s How to Stop

Sometimes it is baggage that we are holding onto that stands in the path of our success. We may just need to learn to let go.

Screaming from the Rooftops: When Insurance Won’t Cover Repairs

With some insurers, the quality of your roof may affect your ability to get home insurance.

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There have been a lot of stories in the news about the latest online security bug, which has been dubbed Heartbleed.

Without diving into too much techno-babble, most secure web sites use a standard security protocol called SSL to encrypt the data that is sent between your computer and the web site that you are logged into. Because the data is encrypted you are protected since even if a hacker were to intercept your information they would not be able to read it.

This Heartbleed bug though opened a door that would allow a hacker to read your encrypted information, potentially stealing your password to your online accounts among other things.strong password

Since financial web sites are among those that commonly use the SSL protocol, you should take steps to make sure you are protected.

What should you do?

First, check the web sites you use for financial accounts and see if they have a statement regarding the bug. They probably do. Not all sites are affected, but many are. If you don’t see anything, contact your institution and make sure they have addressed any issues related to the bug.

Second, now would be a great time to change your passwords for any online services you use. It is a good practice to do this periodically anyway, and especially after a security flaw like this one is revealed.

Third, it is always wise to review your monthly statements for any transactions that you don’t believe you made. It is also a good idea to check your credit report at least once a year. If it has been a while, now would be a great time to do it.

What constitutes a bad password?

Obviously the main point of a password is it should be difficult to guess.

  • Don’t choose easy combinations like “111111″ or “qwerty” or “abcdef”
  • “Password” is never a good choice, nor is it a good idea to make your password the same as your logon id.
  • Don’t use easily guessable words like the name of your spouse or your children, pets, birthdays or anniversaries, where you live, or any other easy to guess facts. As a side note:  be careful what you post in profiles on your social media web sites. Posting items like your birthdate, home town, etc. just makes it easier for a criminal to get information about you.
  • Never leave a password blank even if it is allowed.
  • Avoid common words you could find in a dictionary.
  • Passwords should be complex, but they shouldn’t be so difficult that you have to write them down to remember them.
  • Be careful about using your password on a public computer like at a library or when using a public wi-fi hot spot like at a Starbucks.

Choosing a strong password

So how do you choose a strong password?

  1. Strong passwords should contain a mixture of lowercase and upper case letters. Mix in some numbers. And if you can, use some special characters or symbols like !, @, %, &, etc.
  2. Longer passwords are better. Ideally, your password should be at least 8-12 characters.
  3. Combine two or three totally unrelated words.
  4. One of my favorite suggestions is to base your password after a song lyric or a common phase by taking the first character of each word. For example, “Mary had a little lamb, its fleece was white as snow.” would yield a password of “mhallifwwas”. The beauty of this kind of password is you are almost guaranteed to have a random string of letters that will never spell out a common dictionary word, but it is easy to remember since you know the song or phase on which it is based.
  5. Use a common pattern that only you know, such as always capitalizing the 3rd character or inserting a number or a special character at a certain place in the password.
  6. Sometimes people substitute numbers or symbols for characters that look similar like a “3″ for and “E” or a “0″ (zero) for an O or a “@” for an “a”.
  7. Most security experts recommend that you do not use the same password for everything. That way if one of your accounts was compromised, other accounts would remain secure. There are a couple ways of doing this:
    • One method is to incorporate the name of the website into the password. For example, I might take the first three letters of the web site and insert them somewhere in my password. So my password for Amazon.com would have “ama” somewhere in it, but by password for Ebay.com would have “eba” at that some location.
    • Another alternative is to use password manager software. When you use these products you need only remember a “master” password for the password manager product. The product then generates unique, complex passwords for each of your sites and enters them for you automatically when you go to the site. I have not personally used any of these products so I don’t have a specific recommendation, but PC Magazine recently published The Best Password Managers which reviews a number of the common options.

Take the time to protect yourself

Take the time to choose a strong password for your online accounts. There are no guarantees that your account will never be hacked, but by taking a few simple steps you can make it very difficult for anyone that may be trying to steal your identity.

Additionally, even if you are unlucky enough to be hacked and someone uses your accounts fraudulently, remember you are not responsible for charges made by a criminal who steals your identity.

Don’t allow stories like the ones related to this Heartbleed bug to scare you away from using online accounts. I love the convenience of being able to access my bank accounts and make simple transactions from almost anywhere. It is a wonderful benefit. Just make sure that you take these simple precautions to keep your information safe.

When is the last time you changed your online passwords?

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Hurricanes, market corrections and your investments

by Bob Snyder April 15, 2014

The last five years have been a great time to own stocks and the market has bounced back and then some from the losses of the great recession. This year so far though has been a bit mediocre as overall stocks have stayed about even. Last Thursday and Friday the market suffered some of its […]

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Best of the week – April 12, 2014

by Bob Snyder April 12, 2014

Here are some articles that caught my eye this week… Get Your Tax Day Freebies and Deals 2014 Here are a bunch of ways you can treat yourself to soften the blow from dealing with the tax man. My Checklist To Financial Freedom How many of these items are you doing today? If you are struggling, […]

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Should I cash out my retirement account to pay off my debt?

by Bob Snyder April 10, 2014

When people start to realize their debt is a problem, one option that often comes to mind is whether to cash out a retirement account in order to pay off the debt. This can seem like a tempting quick fix. Let’s face it. Paying off debt is hard. It takes discipline and sacrifice. If I have […]

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The moving target of contentment

by Bob Snyder April 8, 2014

“He who is not contented with what he has, would not be contented with what he would like to have.” – Socrates I believe one of the keys to financial success is contentment, but one of the problems with contentment is that it can be a bit of a moving target. No matter what your […]

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Best of the week – April 5, 2014

by Bob Snyder April 5, 2014

Some articles that caught my eye this week… Insurance Policies You Don’t Need  Having the right kinds of insurance (home, auto, health, life) are a critical part of a sound financial plan. But there are a so many kinds of insurance out there and many of them are just a waste of money. Make sure […]

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The discussion you MUST have with your fiance before getting married

by Bob Snyder April 3, 2014

A recent study by the National Foundation for Credit Counseling showed that more than two-thirds of engaged couples were reluctant to discuss financial matters with their fiance prior to marriage. The actual question asked was: If I were getting married, I think that discussing money with my fiance would… Be a necessary, but awkward, conversation […]

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