Bojack Horseman, FHA and PMI all cultivated horrible reputations in the 1990s.
Bojack fostered his young co-star’s drug addiction, and should not be forgiven.
FHA used to require full pest reports and clearances with every transaction. That requirement is now long gone, but it stigmatizes FHA to this day.
And PMI was simply awful, as it was overpriced and very hard to eliminate.
But, fortunately, PMI has been completely redeemed as a result of three things: (1) Good regulations imposed in the late 1990s and after 2008 – and yes, it is very hard for me to admit that there are “good regulations” on occasion :) (2) Intense competition; and (3) High rates.
As a quick reminder, lenders usually require PMI when a mortgage loan is over 80% loan-to-value, or when there is less than 20% equity. PMI only protects the lender in the event of default too. It does not protect borrowers.
3 Reasons We Love PMI Now
1) Good Regulations.
PMI used to be nearly impossible to eliminate without refinancing. But, new regulations in the late 1990s made it easier for borrowers to petition out of PMI when their equity levels hit 20%, and they forced note holders/services to automatically eliminate PMI when equity levels hit 22%. Additional regulations after 2008 made eliminating PMI even easier.
2) Competition Pushed PMI Rates Way Down!
The first round of competition came in the 1990s with the advent of piggyback 2nd mortgages and subprime loans that helped borrowers avoid PMI altogether.
The second round came with more entrants into the PMI space after 2008, and the rates started to plummet.
Strong borrowers now see PMI rates as low as 0.09% for 85% LTV, 0.15% for 90% LTV; and 0.2% for 95% LTV! In the 1990s, those rates would have ranged from 0.5% to 1.0% or more.
Let me explain how cheap that is. For a $500,000 loan with 10% down, the PMI can be as low $750 per year, or $62.50 per month (with a 0.15% rate)!
3) High Rates.
The rate increases we’ve seen in recent years have made the main PMI alternative much less appealing. That alternative is a Home Equity Line Second Mortgage. Because those equity lines are tied to Prime Rate, they became far more expensive when Prime Rate climbed from 3.25% in 2021 to 8.5% in 2024. Prime Rate is now down to 7.5%, but even that rate makes the equity lines less palatable.
There is one more factor that has made PMI much more common: high home prices. Most buyers cannot come up with enough money to put 20% down in today’s market.
Long story short: Borrowers should not only NOT fear PMI, but they should welcome it as very inexpensive tool that enables them to get the best financing available with less than 20% down.
