Is there any reason a person would voluntarily choose to have PMI?

Question

Private Mortgage Insurance (PMI) seems to be treated as a necessary evil. Inquiries about pmi on this site and elsewhere almost always revolve around avoiding it - how to avoid being required to purchase it, how to cancel it, or how to stop automatic premium deductions after it has been cancelled. This strikes me as odd. Most forms of insurance have benefits and drawbacks, and quite a bit is written on when e.g. life insurance, disability insurance, automobile collision coverage, automobile liability coverage in excess of that required by local law, etc. is a good idea and when it is probably not needed. For example, purchasing collision coverage on grandma's old 1986 Buick that needs $3,000 of transmission work is probably not the best use of my money, even if the Geico salesperson offers me a quote, but it could be a good purchase for a low-mileage foreign sports car, depending on how much I drive it and how. By contrast, I can't find even a single source explaining under what conditions I might actually want to go out and add PMI to my mortgage.

For example, Investopedia offers 6 Reasons to Avoid Private Mortgage Insurance, but 0 reasons to go out and get it other than the fact that the lender demands it as a condition of the mortgage.

Are there any reasons why a person would voluntarily choose to purchase PMI despite it not (or no longer) being required for their mortgage? For example, would someone ever say, "Wow, I'm glad I didn't cancel PMI! When [rare phenomenon] occurred, they were there for me and gave me what I needed so I wouldn't default on my payments!".

Answer 1

Private mortgage insurance protects the lender if you stop making your mortgage payments. It does not benefit the borrower, aside from the fact that many lenders require it if your down payment isn't large enough. Paying for PMI is essentially paying for insurance to protect someone else's investment - if you're not required to do it, there is no possible benefit for the borrower. It's like buying car insurance for someone else's car - it will cost you money every month, but there is no scenario in which you will get any financial benefit from it.

Paying for PMI certainly has its uses and can be the right decision, in order to get a loan in the first place, or to get a better interest rate, or to be able to make a smaller down payment. But I can't think of any reason where you'd have a loan, reach 20% equity, and then voluntarily continue to make PMI payments to protect the bank's interests.

Answer 2

The best way to understand insurance policies in general is to consider who gets paid, and under what circumstances.

Simply put, PMI policies pay your lender. The condition under which they pay is if you default, and the bank is not able to recover the balance of the loan.

If you buy a house for $100,000 with $10,000 down and a $90,000 loan, and then you walk away and the loan defaults, the bank will repossess your house. But if they can only sell it for $80,000, they've lost $10,000. Your PMI policy would compensate the lender for that $10,000 loss. However, if they can sell your house for $95,000, then the PMI policy doesn't come in to play. Of course, lenders don't know ahead of time if they can recover a certain amount at some arbitrary point in the future, so PMI policies exist to protect them if they can't.

Once you understand the mechanism in which PMI operates, the attitudes and behaviors around it become clear:

• There's literally no benefit to the borrower. That's why you never see benefits listed in the web searches you're doing. The borrower gets nothing out of having PMI. (Except, as others mentioned, they may be able to get a loan with different terms than if they did not accept a PMI policy).
• There is a lot of potential benefit to the lender, for home loans where the borrower may end up upside down (owing more than is recoverable from the house). This is why PMI is common on loans with very small down payments.
• As the loan is paid off, and the borrower has more recoverable equity above the balance on the loan, there is literally no point in having PMI, even from the lender's perspective. If the lender has an outstanding balance of $50k but repossessing the home and selling it can net $100,000, the policy won't even come in to play. So, there's arguably no benefit for anyone on a loan where the borrower is unlikely to be upside down.

Many banks don't push PMI for borrowers who don't legitimately need it (i.e. they don't try to sell it to someone with a 50% downpayment), because doing so would not likely add any benefit for them, and a cost-savvy borrower would likely either reject the PMI or just shop elsewhere, with a bank that doesn't try to push it.

PMI policies are underwritten and priced similarly to the mortgages themselves. Typically, a policy will be priced based on the risk (the likelihood that the borrower will default) and the potential claim size (i.e. the assessed value of the house and the loan to value ratio). When your lender pulls your credit score and other documentation to write your loan, that information is shared with the PMI vendor writing the policy. In effect, in loans where PMI is required, it is often the case that the PMI vendor's approval process can trump the lender's - for instance, many PMI vendors won't write policies for borrowers under a certain credit score (typically 620), which basically means banks won't give mortgages that require PMI to those borrowers, even if the bank's underwriters would allow the loan to be approved.

Answer 3

There are two reasons I can think of, but they both boil down to the reason that lender will give you a mortgage with PMI, and won't approve a loan without it. Assuming the lender requires PMI for all mortgages with less than a 20% down payment:

• If you can't come up with enough cash for at least a 20% down payment, you can either get the loan and pay the required PMI, or not get the loan. Technically voluntary, although you don't have the loan/house if you don't do it.
• If you do have enough cash on hand for at least a 20% down payment, you can either get the loan without PMI, or put down less than 20% and pay PMI so that you can use the rest of the cash for something else (needed repairs, wanted improvements, extravagant housewarming party, investments, etc.). Obviously, you'd need to consider whether the alternate use of the funds justifies the expense of PMI.

The other insurances you mention (life, auto, etc.) are to protect your own interests, and that is your motivation to get them. PMI is to protect the lender's interests. Really, they are getting insurance against you not repaying the loan, and just passing the cost of that insurance on to you. If you can get a loan without it, there is no benefit to you add it. The benefit/protection is to the lender, so it only makes sense to voluntarily pay it if the lender offers something in exchange.

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The reasons above address paying PMI on a new mortgage. As far as continuing to pay it when it is no longer required, there is a case where it may be cheaper than the alternative. Dilip Sarwate's answer to a question about a lender refusing to remove PMI summarizes/quotes a CFPB article about PMI removal. Considering:

• You are eligible to request removal of PMI when your loan reaches 80% LTV (loan-to-value ratio: how much you owe vs what the house is worth)
• The lender must automatically terminate PMI when your loan is scheduled to reach 78% LTV
• The lender may require documentation from you if you request removal, and this documentation may cost you money (e.g. appraisal fees)

If you reach 80% LTV, and the costs of the documentation your lender requires exceeds what you will pay for PMI by the time you reach 78%, it may make sense to opt to continue paying PMI, despite being able to remove it.

Answer 4

The benefit to the homeowner is that they get to buy the house with a lower downpayment than they would otherwise need. So to make up a case where you might reasonably want to pay PMI...

Say it's just after the stock market crash of 2008. You have $50K in cash, you want to buy a house for $250K, but you also think that this would be a really good time to put your money in the market. So instead of using your $50K to make a 20% down payment, you choose to put 10% down, pay PMI, and invest the other $25K.

So you guessed right, and after a couple of years the market rebounds. Your $25K is now worth $40K, so you can put a bit less than $25K towards the mortgage, stop paying PMI, and have around $15K profit.

Answer 5

Private Mortgage Insurance is favourable to individual property flipper.

Because individual flipper simply can't raise their private insurance (and it is costly) to cover multiple loans. Thus, PMI will come in handy since it applies to the individual mortgage.

Answer 6

I think there is a point that the other answers haven't addressed. If you default, and the bank recovers its investment through PMI, then you have still defaulted. You have still been forclosed on, and will still take a hit to your credit rating. According to this article, PMI only covers a percentage of the bank's losses anyway. So having PMI does not protect you in any way. It it is just a protection for the bank that you have to pay for in order to get the loan.

Answer 7

Yes. It insures you in case some claim from somewhere is made against your house. And this can happen , and has happened, from long ago EG when an indian tribe claimed they owned the land because of a long forgotten govt treaty. As I recall the claim was valid and people got hurt who did not have insurance protecting them.