If you’ve done much research regarding mortgage financing, you’ve probably heard the term “Private Mortgage Insurance” …
You may have also heard that Private Mortgage Insurance is scary or should be avoided. But in reality, in the right situations … it can be the solution to your home buying and financing challenges.
What do I mean?
Let me start by explaining what Private Mortgage Insurance is …
Private Mortgage Insurance, often referred to as PMI, is insurance provided by a private mortgage insurance company. The insurance protects Lenders against loss (to an 80% Loan Limit) if a Borrower defaults on their mortgage. This, in turn, enables Lenders to offer financing options to Borrowers making smaller down payments. (Mortgage Insurance is provided and available through several privately owned companies.)
As housing prices have risen and it’s become more challenging to save for down payments, Private Mortgage Insurance has become an option considered more frequently by Borrowers. When utilized, it enables Borrowers to receive Loan Approval, even when they have placed less than 20% down payment on a home purchase. That can be a very welcomed advantage.
Next: Private Mortgage Insurance Costs, How PMI is Paid, Pros and Cons
Home Buyers/Borrowers must know: Utilizing the Private Mortgage Insurance option does come at a cost. Typically that cost is paid in monthly increments as a portion of the monthly escrow payment, along with prorated shares of Real Estate Taxes and Homeowners Insurance. Once the Lender receives the payment it, in turn, pays that same amount to the Private Mortgage Insurance Company.
There are varying stages or levels of Private Mortgage Insurance charges/costs. Costs are based on the increments of Down Payment percentages made by a Borrower (3%, 5%, 10%, and 15% Down Payment).
- The greater the Down Payment percentage: The PMI is charged/calculated at a lower percentage of the loan amount (thus lower Monthly Payments toward PMI).
- Credit Scores: Credit Scores affect the cost of Private Mortgage Insurance. The higher the Credit Scores, the lower the costs.
But other payment methods for PMI do exist: PMI can be paid by the Borrower in one lump sum at the time of Closing as part of their Closing Costs. And in some instances, Lender-paid mortgage insurance is also an option available to Borrowers. (See below for more information).
Next: The differences between Conventional Loan PMI and FHA Loan PMI.
Following are facts regarding both:
- Costs are calculated based upon:
- Private Mortgage Insurance is required on Conventional Mortgages where the first mortgage loan is GREATER than 80% of the Purchase Price.
- The Borrower’s MIDDLE Credit Score
- Down Payment percentage
- The PURPOSE for the loan (Purchase, Cash-Out Refinance, Etc.)
- For a Borrower-Paid Monthly Payment Plan: Every 20 point variance in Credit Score, affects the amount of Mortgage Insurance paid
- Lenders can require the existence of PMI until the Loan Balance is paid down to 80% of the original Sales Price/Value
- Lenders must release a Borrower from paying any Private Mortgage Insurance when the loan is paid down to 78% of original Value/Price
- Lenders must remove PMI at the 78% level
- Borrowers must request the removal of PMI at the point a loan is paid down to 80%
- Refinancing of a loan that has PMI is possible and is a way Borrowers can eliminate or reduce the cost of their Private Mortgage Insurance
FHA Loans (Federal Housing Administration):
- ALL FHA Loans require Mutual Mortgage Insurance, to some degree or some cost, regardless of Down Payment Percentage. (The Mortgage Insurance required by FHA is mandatory, guaranteed, and government issued)
- Variations are based upon the TERM of the Loan (i.e. 30-year or 15-year loans)
- If the Down Payment is 10% or MORE, the cost will be lower than if putting down just the minimum Down Payment (Very much the same as Private Mortgage Insurance)
- FHA charges an upfront, but financeable, Mortgage Insurance Fee of 1.75% of the Loan Amount.
- Most Borrowers choose to borrow the FHA charge. The cost is added to the true “Base Loan Amount” and is financed over the term of the Loan (30 years).
The advantage to borrowing this FHA charge is: Borrowing typically results in a slightly higher monthly payment … but saves the Borrower several thousand dollars in costs at Closing.
There are some loans that DON’T have Mortgage Insurance. Those are:
- VA Loans: Available only to Veterans with Benefits
- Conventional Loans with 20% or more Down Payment, resulting in a loan amount of 80% (or less) of the Purchase Price
- Loans that charge a HIGHER Interest Rate to “offset” or allow the Lender to pay the PMI on the Borrower’s behalf.
- “Piggy-back” loans, where the Borrower’s down payment is 10% of Purchase Price, but there is a Second Mortgage taken at the same time as the First Mortgage, to eliminate the need for any PMI.
Typically, the cost or payment for the 2nd Mortgage is less than the cost of the PMI, therefore, a possible advantage to the Borrower. (A thorough analysis should be conducted with your LO in order that comparisons can be properly made.)
If you’re a hopeful home buyer, keep an open mind regarding Private Mortgage Insurance. PMI may be a sound, viable, and beneficial solution for you when financing a home.
Talk to a Lender … as soon as you decide to buy.
As you can tell from the info provided above, Private Mortgage Insurance is not “one-size-fits-all”. Every Borrower’s scenario is different. With enough time, a Lender can help you “position” yourself best for the most advantageous mortgage program and PMI option.
Take the steps to learn all the ins and outs, pros and cons that come with PMI. Get the facts about PMI as they pertain to you. That way you can make a sound informed decision moving forward.
Post courtesy of Gene Mundt, Chicago mortgage originator.