The Game of PMI

The Game of PMI

In another video we talk about how you don’t have to put 20 percent down to buy a home. But when I tell people that, the very next thing they say is, “but I don’t want to pay PMI.” So, what is PMI?

In the old days if you wanted to buy a house, you had to put 20 percent down. But then the idea was born for an insurance option that would insure that top 20 percent of the loan for the lender allowing buyers to put less money down.. If for some reason the loan defaulted, that insurance would minimize the bank’s loss. 

PMI was a win-win for the bank. They could make more loans and the borrower would pay for the insurance in your mortgage payment!  That doesn’t sound awesome for the buyer, does it? But is it really that bad? Your loan with a bit of PMI might just be better than next year’s 20 percent down loan. Plus, once you’re in the housing market you’re building equity.

If you’re putting less than 20 percent down you’re going to be paying a little more for that mortgage in some way. Let’s play the game of PMI. There are four doors. Which one do you choose? And which one is best for you? To shed light on that, let’s give an example of a $400,000 loan and let’s assume you’re putting 5 percent down and you have pretty good credit.

Option 1 is Borrower Paid Single Premium.  Basically, showing up on the closing table and writing a check for say $6,600 in this example. You take that check, you give it to the insurance company and you don’t have to worry about PMI ever. This option does give you a lower payment, but unfortunately that insurance only protects that loan. What if you refinance? What if you move in a couple years? And let’s not forget, the cash you need at closing is much higher!

Option 2 is probably the most familiar and that’s Monthly PMI. That’s where you just look at your mortgage statement and you’ll see a line item for mortgage insurance.

In this case, $183 a month increase to your payment. But one big negative is it’s not tax deductible for most people.  But a positive is it does disappear once you reach a 20 percent equity position.

Option 3 is the one that we see many clients take advantage of, Lender Paid Mortgage Insurance.  This is where you incorporate that Single Premium PMI, that $6,600 charge in option 1, and you roll it into your actual interest rate. The mortgage rate is a little bit higher, but with the removal of the monthly PMI, you can save money, in this example,  $50 per month. Of course, when you start mixing in tax savings on top of that, the difference can be even bigger. In this scenario, it could save about a $1,000/year by choosing Option 3 and building the PMI into the actual interest rate.

Option 4 is a combination mortgage allowing you to totally work around paying PMI. The industry term for this is an 80-15-5. That’s where you finance 80% in one mortgage, 15% in a second mortgage and the remaining 5% would be your down payment.. The benefit here could be a lower payment. Second Mortgages typically have higher rates and adjustable rate features.  In some cases, they can be interest only through using a Home Equity Line of Credit.

So, you shouldn’t be so quick to say you don’t want to pay PMI. If you are thinking of waiting to buy a home because you want a larger down payment, you should take a look at these lower down payment options. Be sure to look at every single option. That’s what I must do for my clients to see which is best. Then once you talk about those options, your life goals, and markets, you get tremendous clarity behind making a decision to see which path is best for you. 

It only takes 10 minutes for one of our mortgage planners at The Downs Group to work up a comparison so do not hesitate to reach out if you have questions.  We are here to help!

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