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.
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.