Posted: February 14th, 2012 | Author: Joe | Filed under: Insurance | Tags: APR, mortgage costs, Mortgage Insurance, Mortgages, PMI, Tips | 1 Comment »
I was looking over some old documents recently and I came across my 1st mortgage. Ah the memories. I couldn’t believe how high the interest rate was – 6.50% – and that was a good rate for the time!
One other thing stuck out to me – no PMI. Not because we had a 20% down payment; we couldn’t afford that at the time. I had thought at the time that my bank was just better than other banks. See, this was a local bank. A small, home town bank – not one of those big evil banks that would catch all the headlines and hate from the public when the bubble burst years later.
It turns out that my sweet hometown community bank wasn’t doing me any favors by offering me a home mortgage with no PMI. PMI is insurance for the bank to cover their loss in the event that the borrower defaults on the loan. Instead of charging me a PMI premium with my monthly mortgage payment, they rolled this premium into the loan itself.
Is PMI included in the APR a good thing?
On the face of it, things looked great. I had a lower monthly payment without the PMI included. But over the long term, it’s more costly to the borrower because that PMI premium adds thousands to the principal of the loan, which in turn adds thousands in interest over the life of the loan (usually 30 years).
Banks love doing this because it juices their return since you’re paying this premium far longer than you would if it were added to the monthly payment.
Here’s a quick example.
Assume a home value of $200,000, with 5% down. This gives us a mortgage of $190,000. Using the CNN Money PMI calculator with these numbers gives us a monthly PMI of $80.
Since the value of the home is $200,000, and PMI is required until there is more than 20% equity ($40k in this case) this means that the outstanding value on the loan needs to be less than $160,000 (200,000 – 40,000).
Next, using the Mortgage Calculator at Bankrate.com, assuming a loan of $190,000 and an interest rate of 5% (currently high, I know, but historically low) and selecting the “Show Amortization table” option shows that it would take roughly 9 years of mortgage payments before the value of the loan would drop below $160,000.
9 years of mortgage insurance payments is: $8,640 (108 payments of $80)
Rolling the premiums into the loan lowers the monthly payments by $80, but adds 8,640 to the overall loan.
$177,185.99 total interest for base loan of $190,000 and $185,243.29 total interest if PMI is added to the loan amount.
That’s a difference of $8057.30.
Add that to the original amount added to the principal:
$8,057.30 + $8,640 = $16,697.30.
So, the bank wants you to think that you’re saving $80 a month by rolling the PMI into the loan, but you’re really spending an extra $8,057.30.
Caveats.
This is a simple example, but I think a compelling one. It assumes that the borrower is keeping this loan for the full 30 years. If you took out this sort of loan and refinanced or moved in 7 years, you’d come out ahead. But then again, you can’t always refinance – as millions of homeowners who owe more than their homes are worth now realize.
Traditionally, a healthy housing market would have some appreciation involved, which would also shorten the time before that magic 20% value is reached, but that would make the PMI included in the APR even worse.
The bottom line is that you never really know how long you’ll have the loan for or what your home will be worth in 10 years time. It’s my opinion that planning conservatively is best. Be at peace with the idea of holding the mortgage for the full term, and don’t count on rising home values to bail you out. That way, you can weather the storms and anything else is gravy.
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Posted: September 22nd, 2011 | Author: Joe | Filed under: Insurance | Tags: Auto Insurance, cheaper car insurance, How To, insurance costs, Tips | 3 Comments »
Car insurance is one of those things people love to hate. It’s mandatory in many states, and most people think there isn’t much they can do about the cost other than shop around every few years. But there are some things that can cut costs even further, and a few that will help avoid unnecessary costs in some situations.
1. Can you drop collision insurance?
As your car gets older and depreciates (loses resale value) there comes a point in time where it’s worth less to replace than you would pay in collision coverage. Collision insurance exists to cover repair expenses due to a collision, but the insurance company will not pay more than the car is worth regardless of the repair costs. Once the resale value of the car drops below the amount you pay in your premium for collision, you’re better off dropping the collision coverage and putting that money into a high yield savings account for your next car (or repairs if you can’t afford a newer car).
To find your car’s current resale value, use the Get Your Car Value tool at Kelly Blue Book (kbb.com).
2. Buy used, or buy GAP.
As discussed in the point above, a new car depreciates the minute you drive it off the lot. Now consider what happens if you buy a brand new car for $25,000 and get into an accident a few weeks later. Say this particular car is now only worth $20,000 but you’ve got a loan for $25,000. The insurance company will only cover up to the current value of the auto, which is $5,000 less than you owe. This is where GAP insurance is a good idea because it covers the gap made by the difference in what you owe vs. what the car is worth.
GAP insurance is a good idea IF you buy new. A better idea is to buy slightly used.If you buy a car that’s 2-3 years old, you end up with a car that’s already experienced the bulk of its depreciation, but is still in very good shape. If you’re disciplined and plan ahead you can buy this new-to-you car with little if no financing. Either way, the chances are that whatever amount you end up taking out a loan for will be below the value of the car and so you can skip the GAP insurance and save even more money.
3. Keep your credit score in good order.
Head over to AnnualCreditReport.com and check your credit history. The report is truly free (not free with purchase of some other service, like the credit report site with the catchy commercials..) and you don’t need to buy your credit score, though you can. You basically just want to make sure all the items in your history are up to date and correct. Each agency has its own proprietary score that should give you a general idea of where you fall on the poor to excellent scale.
The idea here is to get to and stay in the excellent range because more and more insurance agencies are checking credit scores of prospective clients, and basing premiums on that score.
Don’t have an excellent credit score? No problem, just follow these tips to improve your credit score and over time you’ll be in excellent shape. After that, you can shop around for a lower rate.
4. Know your worth.
Well, know your car’s worth anyway. It’s a dirty little secret that many insurance companies offer incentives to claims adjusters to minimize the payout to customers when a claim is filed.
It is to your benefit that you be aware of this and don’t accept the first decision if you feel the agency is not meeting their obligation to pay the full amount of your claim.
Know how much your car is worth both as a trade-in and on the open market (again, use Kelly Blue Book’s Get Your Car Value tool) before entering into negotiations with the claims adjuster. If there is an injury involved, have a full understanding of the extent of the injury and speak to an attorney if necessary.
5. “I have this friend who…”
Some insurance companies may view a call as a claim and adjust rates accordingly, even if you’re only asking whether a specific incident is covered. Even worse, the claim may go in a comprehensive report that other insurers use when determining what rate to charge customers for premiums!
In other words, don’t call your insurance agent to ask if the mirror your son broke with his cave-man style baseball swing is enough to meet your deductible. This could be considered a claim by some agencies, as it pertains to an actual event. The better course of action is to be vague in your question. Only ask what your deductible is, or use the old “my friend” ploy. For example:
“I have a friend and his son broke the mirror on his car but his insurance company told him that it didn’t meet his deductible and he’d have to pay out of pocket. This got me wondering about my policy and what might happen to me if I were in his place..”
Keep any discussion as general as possible until you know what’s covered and what’s not and where you stand in the matter. Otherwise, you could end up paying more in the end.
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Posted: May 31st, 2011 | Author: Joe | Filed under: Insurance | Tags: Insurance, Life Insurance, Mortgage Insurance, Mortgages | 4 Comments »
I had never heard of Mortgage Protection Insurance until a week ago. I usually only get bills and credit card offers in the mail these days, but last week I got something new. Here’s how it happened…
The case of the misleading mailing.
The mailing was a nondescript brown envelope with an unfamiliar return address and nothing else on the outside besides my address and red letters that looked as though they were hand-stamped and read:
“Requested materials inside”
Requested materials? I don’t remember requesting any materials from anyone.
At first glance it seemed like a credit card application. I’ve received many in unmarked envelopes like this and even a few with “URGENT” printed in red on the front. But this seemed just different enough to make me curious.
When I tore into the envelope, I discovered a half-page typed form stating in large letters at the top:
“Notice of mortgage protection.”
It looked important, and had “return promptly” printed off to the side in bold lettering. Then I saw that everything below that heading was a bunch of fill-in-the-blank questions, with very detailed information about me and my mortgage.
Whoever this was knew the exact total outstanding amount of my mortgage. Once I saw that they were asking if I or my spouse use tobacco, I realized what this was – a life insurance product. My eye moved to the bottom and read:
“Pay your mortgage with your life insurance policy!”
I say this is a misleading mailing because I never requested anything from anyone about Mortgage Protection Insurance. Furthermore, the mailing was meant to look like something I should fill out and return ASAP or I might be jeopardizing my mortgage, and hence my home. I have no idea even who the insurance company is or how they got my info, though I assume my bank sold it to them as one of their partner relationships that I cannot opt out of.
What is mortgage protection life insurance?
So enough about this scam mailing, what is Mortgage Protection Insurance, and is it a good idea?
Mortgage Protection Insurance (MPI) is essentially a life insurance policy that will pay off the outstanding balance on your mortgage if you die before your house is paid off. Sometimes disability insurance is included, so your mortgage payments will be made for you in the event you become disabled and cannot work.
It is also sometimes called Mortgage Payment Protection Insurance (MPPI).
MPI vs. PMI – What’s the difference?
The financial services sector and insurance companies love their alphabet soup of acronyms. MPI and PMI sound similar, but they are two very different things.
PMI stands for Private Mortgage Insurance. You are required by law to pay for PMI when you purchase a home with less than 20% down payment. Private Mortgage Insurance is not for you and it’s not to pay your mortgage if you lose your job. It is solely for the bank, and it pays their insurance policy on you in the event that they need to foreclose on the property. Essentially, it helps mitigate the bank’s loss on the property if you default on your mortgage and there is less than 20% equity on the property.
Mortgage Protection Insurance on the other hand has nothing to do with the bank.
MPI is life insurance you buy from an insurance company and its only purpose is to pay your mortgage in the event you die. Another variant of this includes disability insurance, to make your mortgage payments if you become disabled and find yourself without a paycheck.
Reasons not to buy Mortgage Protection Insurance
There may be some cases where Mortgage Protection Insurance makes sense, but I think there are many reasons it doesn’t makes sense most of the time. Here’s why…
The first, and most obvious case is when you own your own home. No mortgage? No sense in paying for an insurance product that you could never benefit from.
Unfortunately, I do not fall into that category as I still have a mortgage I will be paying off for the next 20 years.
So here are the reasons I will not be buying MPI anytime in the foreseeable future:
- I already have a life insurance policy, and my mortgage was considered when determining the amount of the policy.
- Mortgage Protection Insurance is a waste of money.
Consider this: one of the main reasons for getting life insurance is to replace your income if you die. The idea being that your beneficiaries can have that money to use as they need. Paying off the mortgage should be one of the expenses factored into the coverage amount. One major problem with MPI is that the when you die, the insurance company will send a check directly to your mortgage company. Your beneficiaries have no choice in the matter.
What if your spouse wants to sell the house instead?
What if paying off the mortgage doesn’t make financial sense?
Consider that today’s mortgage rates are historically low. Rates will eventually rise, and most likely inflation will rise with them. So, it’s entirely possible that someone who takes out a mortgage today or refinances at today’s low rates and who is faced with a life insurance payout 10 or 15 years from now will be in a situation where they would actually make money putting that lump sum in a high yield savings account instead of paying off the mortgage.
Just such a situation happened in the early 1980′s. A person receiving a lump sum could have made 18% a year by putting that money in a money market account. Contrast that with the potential 7-10% mortgage rate and you’ll see why it was a money loser.
But it’s even worse than that. When the insurer pays the benefit for Mortgage Protection Insurance, it’s paid directly to the mortgage company- not the beneficiary. The beneficiary has no control whatsoever over the money, but worse still – MPI is a declining-benefit policy!
It’s called a declining-benefit policy because while the premium payment remains constant, the payout is reduced over time to keep up with the declining outstanding mortgage amount. That means you end up paying a steady amount in premiums, and get less back over time.
Compare that with fixed, lump sum payout of a standard life insurance policy and you see why MPI really only benefits the insurance company, not the insured.
As I see it, Mortgage Protection Insurance is a bad idea (generally speaking) because:
- You have no control over how the benefit payout is used – it pays off the remaining mortgage, and that’s it!
- The amount you receive in payout goes down, while premiums stay constant.
- Standard term life insurance is a better buy because it provides greater control and flexibility over how the payment is used, and provides a larger payout relative to MPI over time.
Given these reasons, and those stated further up, I’m taking a pass on Mortgage Protection Insurance.
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Posted: April 21st, 2011 | Author: Joe | Filed under: Insurance | Tags: Auto Insurance, car insurance, cheaper car insurance, Insurance Rates | 3 Comments »
Have you ever wondered which state is the most expensive to insure a car, or which is the least expensive state for auto insurance? Here’s a list of average insurance costs by state that may help answer those questions.
I live in the once great state of New York, and I have to admit I’m quite surprised to find that while NY seems eager to compete with California in the race to bankruptcy, New York is just about in the middle when it comes to auto insurance costs.
Here’s the top 10 most expensive states for auto insurance, and the average cost:
1. Michigan, $2,541
2. Louisiana, $2,453
3. Oklahoma, $2,197
4. Montana, $2,190
5. Washington, D.C., $2,146
6. California, $1,991
7. Mississippi, $1,896
8. New Mexico, $1,896
9. Arkansas, $1,836
10. Maryland, $1,807
I’m not surprised to see that Michigan is #1. After all, they’ve practically been living in a depression for the better part of a decade now, and probably have to tack on hundreds of dollars in fees just to slow the pace of their economic decline. Also, with cities like Detroit that have a reputation for high levels of crime, you’ve got to figure auto theft is going to drive costs up as well.
Also, these costs are a function of the number of uninsured drivers in the state, and Michigan actually guarantees unlimited personal injury protection payments to people injured in auto accidents! That means insurance companies are on the hook for up to $480,000 per case, plus 3 years lost wages and the tax payers foot the bill for the rest. Of course, the insurance companies have to pass those costs on to the insured drivers, causing rates to rise and exacerbating the problem even more. Way to go Michigan.
You see something similar in Louisiana, where courts tend to award larger than average payouts in auto injury cases, driving up the cost of insurance.
Oklahoma blames their high costs on weather related claims.
So where is the cheapest place for auto insurance?
Here are the 10 least expensive states for auto insurance:
41. Arizona, $1,280
42. Utah, $1,272
43. Virginia, $1,237
44. Iowa, $1,179
45. North Carolina, $1,154
46. Ohio, $1,152
47. Tennessee, $1,146
48. Wisconsin, $1,128
49. Maine, $1,126
50. South Carolina, $1,095
51. Vermont, $995
There aren’t 51 states in the union, so obviously this list include the District of Columbia (i.e. Washington D.C.), which incidentally is also a high crime site and comes in at the 5th most expensive place to insure your car.
Vermont is by far the cheapest, and it’s no coincidence that they also have the fewest congested roads, and plenty of rural areas so claims are less and tend to be for smaller amounts as well. Cows just don’t sue as much as pedestrians. 
Check out the complete list here.
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