PMI—3 LITTLE LETTERS THAT CAN COST SO MUCH
No one dislikes Private Mortgage Insurance (PMI) more than a loan officer. We have yet to meet anyone who liked having to pay it and for good reason. It’s a non-deductible expense. It increases the cost of any given mortgage therefore making it more difficult for borrowers to qualify. It also means that not only does the bank have to approve the loan but so does the PMI insurer, increasing the risk of a loan being declined or additional conditions being imposed. It can also mean an extra few days to get an approval.
PMI is imposed whenever a borrower has less than 20% equity in a property. It insures the lender against loss in the case of foreclosure due to the relatively small amount of equity in which to recoup expenses from. This is the reason many people will tell you that you need to put 20% down when purchasing a home. Which, although nice if you can do it, is not easy to do for many people, especially first time homebuyers.
So how does someone avoid paying PMI? Recently there has been an explosion of mortgage programs designed to avoid paying PMI. Each option has its pro’s and con’s.
One option is to pay an upfront fee to not have the PMI in your payment. In effect you are prepaying the policy. This will give you a lower monthly cost but a higher upfront cost. A few programs will afford you a refund if you payoff the loan before the PMI would have expired; but in most cases, if you sell or refinance in the first few years, you will have not gotten your moneys worth for the upfront cost.
Another option is to take a loan program that gives you a higher rate to compensate for no PMI. The advantage is that it gives you more tax deductibility than you would have had with the PMI done separately. Many no income check and sub-prime credit loans are done this way because they cannot obtain PMI through the insurer’s. Some programs may even lower your rate when the PMI would have normally been removed .
The most popular option today is to do a 1st mortgage for 80% of the purchase price, and a second mortgage for the remaining amount that will be needed. For example, if you wanted to buy a $100,000 house and put 10% down, we would do an $80,000 1st mortgage and a $10,000 second mortgage. Since the first mortgage is at 80% or less, there is no PMI. The second mortgage can either be a fixed rate or an equity line of credit. Many people prefer this method because it affords the most flexibility and will usually provide the lowest overall costs of any of the options we’ve looked at.
When considering the right option for you keep in mind your long and short term goal for your home. More often than not that will be the deciding factor in your choice of loan products. Keep in mind that if you currently have PMI, and have had your current mortgage for more than 2 years, you should give us a call to review how you can get it removed.
Robert & Craig Winawer
