These are two things that I hate: PMI and ESCROW accounts. This is a way for the banks to make a little more off your backs. It may not sound like a lot but, if you are trying to figure out your profits, this can be a hinderence.
PMI is a flat out rip off. Sorry, the bank or mortgage company keeps in on as long as they possibly can so, you make nothing off that extra cash each month. If you are running this business, (real estate investing is a business), you want to look at how your money is spent and not be frivolous. Think about it, if you are spending anywhere from $50-200 dollars a month on PMI, that money could be used in your reserves, on a new purchase or in your savings. Instead, it goes in the bank’s pockets.
Secondly, Escrow accounts are another avenue for the bank to take ‘your money’ but, give you nothing in return. I do not have it for my current home but, it is part of investing.
In many cases you are giving up 3 to 6 months taxes (pre paid) for no reason. Sorry, but the county, city or state does not get the money any sooner and you get zero interest for doing this. This is another way for the bank to use your money in advance.
In the end, the mortgage company comes up with ‘estimates’ for your loan payments each month. This varies and goes up each month. This can go against your profits.
Sorry, if you think is nitpicking but, this is your money. I would rather donate it to a charity then give it to a mortgage company.
You may look into 80/20 loans. I agree with out about PMI for sure. Just more insurance costs that do not help you. With an 80/20 loan you avoid PMI but the 2nd mortgage rate will be a little higher. Better to buy property that is below retail say at less than 80% of the market value and avoid PMI that way too if possible.
There are companies that do not require impounds for taxes and insurance. There are pros and cons to each. I like being forced to pay the taxes and insurance monthly but like you do not want to keep extra funds in an account. If you were the banker you would want extra money in case the fees were higher when the bills come due. Maybe looking at their point of view will help. Next best thing is to become a bank and then you can collect the fat fees and stuff your pockets full of cash.
Ted, thanks for the reply.
Yes, it is difficult not getting this PMI. It is another cost that you have to figure into the equation. What I don’t like about ESCROW is that your payments change from month to month (go up) which also is somewhat hard to calculate when you talk about your bottomline.
John
P.S.
If I were a bank, I would not worry about ESCROW, PMI, fees, etc. I would be collecting them and enjoying their benefit.
It is just like the guys on all of these sites who ‘sell’ you their courses and ideas, they have nothing to lose once they sell this to you.
Ted, buying at retail when it comes to loans or houses, is deadly. I tried explaining this concept to my friend’s wife. She could not understand why I would ask a seller to hold back at least 15,000 over 10 years with no interest. She could not even see the concept of time and money. She would rather go to the bank or mortgage company and pay everything with interest. Does this make sense? No clue on her part.
How about a “single file,” where you pay 1% of the mortgage amount as your PMI, up front (ex. $200,000 loan is now $202,000 with the single file) and is tax deductible now that it is part of your mortgage. No 2nd at a higher % rate.
Thanks to Suze Orman for this tip.
Immy, you will have to explain this ‘single’ file concept. It sounds interesting. How do you establish this?
I like the idea. PMI drives me nuts. I just hate tossing my money away to the wind. You also get zero tax benefits for it. It is another way for the mortgage company or bank to get their ‘digs’ into you.
I saw this several weeks ago on Suze Orman’s show on CNBC on Saturday nights (yeah, I’m lame). She explained that the better way to avoid PMI if you’re over 80% LTV is to do a “single file” - which I explained above - instead of a 80/20 or 85/10/5 or whatever combination you want to do to come to 100% w/o PMI.
I wrote it down because I thought if nothing else, that’s what I will use the next time I buy my own personal house (lucky this first time - used a VA loan, no PMI) if I can’t get it through investing methods.
You just tell the lender straight up you want to do a single file. It’s 1% of the mortgage amount, and it’s added onto the mortgage amount and then you pay whatever interest rate you have on that new, total amount. They’re not going to advertise it. Just tell them you want to do it, and if they won’t you’ll find someone who can.
Immy, thanks for that tip! I hate PMI. It is a ripoff.
I sent a request to your company. Who does your site? Well, I guess you will send that information to me in a day or so.
I had some other questions.
What real estate markets are you involved in?
I am trying to work out some deals in Colorado. Next week, I plan on traveling to PA, to check some property out as well with a mortgage broker, realtor and a rehab specialist.
I love Kall8. It is amazing. I use it for my investing, to advertisie rentals and as separate number just for my faxes. 100% reliable, powerful and in real time to boot. Good luck with it.