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!".

score 57 · Answer 1 · edited Dec 07 '19 at 10:17

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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.

edited Dec 07 '19 at 10:17

Volker Siegel

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answered Dec 04 '19 at 20:46

Nuclear Hoagie

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You might want to mention Mortgage protection insurance, which is basically reverse PMI. In the sense it makes the home owner whole if they have to default for reasons beyond their control. – Vality Dec 04 '19 at 20:49
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+1 for the second paragraph. Choosing to pay PMI in order to qualify for certain loan features. This most closely answers the question. – Jammin4CO Dec 05 '19 at 14:30
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I can think of a reason where you'd have a loan, reach 20% equity, and then voluntarily continue to make PMI payments - if you owned the bank! (haha) – Dec 06 '19 at 00:32
"but there is no scenario in which you will get any financial benefit from it" - there is, if it stops them from suing you for damages if anything bad happens. – vsz Dec 06 '19 at 07:17
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@vsz if it stops them from suing you for damages if anything bad happens To be clear, that is not, at all, how PMI works. It does not stop the bank from coming after you for anything you owe them. PMI doesn't pay a dime until the bank has squeezed you dry, or exhausted all avenues to attempt to do so. PMI does not release you from obligation to pay. It has, quite literally, zero direct benefit for the borrower (other than potentially allowing you to get a loan you could not otherwise get). – dwizum Dec 06 '19 at 13:38
@dwizum : I was talking about the car insurance example. If I cause an accident, my insurance will pay for the victim's repairs. However, if I don't have an insurance (which is by the way illegal not to have in most jurisdictions) the victim will sue me for damages. – vsz Dec 06 '19 at 13:57
@vsz - okay, with respect to car insurance, that makes sense. I wanted to clarify because - with respect to PMI - the situation is clearly very different, and people who are trying to piece together a scenario where PMI helps the borrower may have taken your comment in the wrong context. – dwizum Dec 06 '19 at 13:59
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"can't think of any reason... reach 20% equity, and then voluntarily continue to make PMI payments" What about the fact that PMI's cancel at 22% automatically, and the cost of forcing it to cancel at 20% can be more costly than paying the PMI for the remaining 2% (in the form paying to re-evaluate your property value to ensure it hasn't depreciated and then paying higher taxes as a result). – zephyr Dec 06 '19 at 16:26

score 25 · Answer 2 · answered Dec 04 '19 at 22:22

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.

Lets say I buy a house for $110k, with 10k down and something happens that is not insurable, but it makes the house worth only $50k. I walk away from the house and default, owing 95k on the house... Is there any way that I can get sued for the additional $45k that PMI might avoid? — JPhi1618, Dec 05 '19 at 19:22
The borrower is always first on the hook for outstanding balance. Lenders only pursue a PMI claim once they've literally squeezed you dry. So - yes - the bank would absolutely come after you for the remaining $45k. They don't technically even have to sue you, you already owe them that money. And mortgage holders are usually pretty high on the list of creditors when someone's in bad shape, so it's rarely the case that PMI pays out unless you are literally broke and unable to have an income. — dwizum, Dec 05 '19 at 19:27
It's a stretch, but I was thinking that having PMI would make the bank "give up" on trying to get money out of you sooner because they have a backup plan. I'm just trying to find a weird edge case where PMI could help a borrower. — JPhi1618, Dec 05 '19 at 19:29
The PMI claim won't pay unless the lender can prove they've exhausted recovery from the house and borrower. — dwizum, Dec 05 '19 at 19:54
Also - if you've never met a collector who works on mortgages, I can tell you "give up" is not in their vocabulary! — dwizum, Dec 05 '19 at 19:54
@dwizum This is interesting, because it seems to introduce two conflicting interests for the bank - one, to pursue you for whatever you owe, is at odds for collecting the PMI insurance which seems to literally guarantee the money for less effort than trying to pursue you if your funds are low. At what point do they "give up" and exercise the PMI claim? — , Dec 06 '19 at 00:36
At what point do they "give up" and exercise the PMI claim? when they've met the conditions laid out in the PMI policy. It doesn't really create any conflicting interest, there's a very clear "order of operations" so to speak. It's the same as any other loss insurance, the criteria for what applies and when is laid out ahead of time to avoid any conflict or subjectivity. — dwizum, Dec 06 '19 at 13:37

yoozer8 · Answer 3 · 2019-12-05T21:53:19.043

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.

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.

The question explicitly mentions keeping PMI after the lender allows you to drop it. Both of your reasons are why you would accept a loan with PMI attached to it in the first place. — chepner, Dec 05 '19 at 14:09
@chepner The question says choose to purchase PMI despite it not (or no longer) being required, which includes both the case where you would accept PMI at the outset and where you would continue to pay it when no longer required. — yoozer8, Dec 05 '19 at 14:21
Your first reason is still a situation where PMI is required. The second seems extremely unlikely, as you are just paying interest under a different name (and PMI isn't deductible under the same terms, if at all, as ordinary interest). The question is more a scenario where the lender says "I will provide this loan. If you like, you can also sign up for this PMI, but it's entirely optional". — chepner, Dec 05 '19 at 14:27
I've never heard of a lender giving a better rate to someone who elected optional PMI. I can't really understand how that makes sense from an underwriting or servicing perspective. PMI can't legally be required outside certain conditions, so what would prevent the borrower from signing up to get the better rate, then dropping it? Do you have examples of this happening? I'd love to learn how it works. — dwizum, Dec 05 '19 at 16:04
@chepner that's right. The question could be under what circumstances a homeowner might say, "My mortgage company let me know I could cancel PMI, but I'm going to keep it because it also pays out for misreticulated splines and my neighbor had some of those last year." — Robert Columbia, Mar 09 '20 at 15:44

score 3 · Answer 4 · answered Dec 05 '19 at 04:46

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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.

answered Dec 05 '19 at 04:46

jamesqf

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PMI is required for a 10% DP, but the question says, "Are there any reasons why a person would voluntarily choose to purchase PMI despite it not (or no longer) being required for their mortgage? – RonJohn Dec 05 '19 at 14:41
It sounds like you're suggesting that PMI is a reasonable expense to pay in order to be able to invest your money in the stock market. That seems risky to me. How do you know that your gains will outweigh the premiums? Not to mention, taking the smaller downpayment option means you'll be paying more interest in that time frame. – dwizum Dec 05 '19 at 16:09
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On a 250k house. the difference in interest over a 30 year mortgage at 3.92% between 10% down and 20% down is $17,553. A PMI policy for someone with A credit on that loan will probably cost around $80 a month, so until they hit the 78% threshold they'll have paid $6,400 in PMI premiums. So the "invest in the stock market" option didn't really net them $15k, it cost them about $24,000 over the life of the loan, so they're $9k in the hole even after their income from the investment. – dwizum Dec 05 '19 at 16:11
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@dwizum: Apparently I wasn't clear about my assumption that after a couple of years they would use the $25K to pay down the mortgage, so they would have only that two years or so of extra interest & PMI payments. As for whether it's a reasonable expense, it depends, just like any market investment. I'm just using hindsight to show a case where their guess at future conditions was correct. – jamesqf Dec 05 '19 at 19:04
@RonJohn It wasn't required for his mortgage. He could have put more money down and not paid PMI. Paying PMI, while not required, allowed him to have a lower downpayment. – David Schwartz Dec 06 '19 at 02:10
@DavidSchwartz the question specifically asks, "Are there any reasons why a person would voluntarily choose to purchase PMI despite it not (or no longer) being required for their mortgage?" – RonJohn Dec 06 '19 at 02:33
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@RonJohn Right. And one reason would be that they prefer a different mortgage even though their mortgage doesn't require it. – David Schwartz Dec 06 '19 at 03:47
As @RonJohn says, this answers a completely different question (why someone might put more or less money down). From the last paragraph: "Are there any reasons why a person would voluntarily choose to purchase PMI despite it not (or no longer) being required for their mortgage? " – eps Dec 06 '19 at 15:58

mootmoot · Answer 5 · 2019-12-06T12:20:45.023

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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.

edited Dec 06 '19 at 12:20

answered Dec 06 '19 at 11:50

mootmoot

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score -2 · Answer 6 · answered Dec 06 '19 at 03:51

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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.

answered Dec 06 '19 at 03:51

Mark Foskey

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Most of the other answers make all these points. Not sure what you think was omitted. – ShadowRanger Dec 06 '19 at 04:22
I thought the other answers left open the possibility that, by protecting the bank, the insurance would have the side effect of letting the borrower off the hook as well. I should have read more carefully, my apology. – Mark Foskey Dec 06 '19 at 18:23

score -8 · Answer 7 · answered Dec 04 '19 at 21:25

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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.

answered Dec 04 '19 at 21:25

jedidiah manowitz

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Isn't that title insurance? – Robert Columbia Dec 04 '19 at 21:26
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Welcome to [money.se]! I believe in your example you're thinking of title insurance. PMI benefits the lender/mortgage holder, NOT the buyer. – mkennedy Dec 04 '19 at 21:27
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Welcome to StackExchange, sounds like you guessed wrong. It happens. FYI you will get +16 rep just for deleting this answer. – Harper - Reinstate Monica Dec 05 '19 at 17:53

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

7 Answers7