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PMI

Conventional PMI Options

Mortgage-InsuranceIt’s common knowledge that home mortgage loans with less than 20% down typically need to be covered by some sort of mortgage insurance.

For conventional loans, it is usually referred to as “private mortgage insurance” (PMI), for government loans (FHA, VA and USDA), the insurance is some sort of program offered by the federal government that also has costs associated with it like PMI, but it has a different name.

While I am licensed to do all of these types of mortgages, for this post’s purposes, I will write only about the insurance that is private – PMI for conventional loans.

There are many different ways to insure a conventional mortgage. All of which are types of PMI. Each one is shown below.

Borrower Paid – Monthly
This is the PMI you probably know about; it’s simply a monthly insurance fee that you pay each month until your loan is eligible to be uninsured. For a well-qualified credit scenario, this tends to cost about .05% of your loan amount each month; for a $200K loan, that’s about $100 a month.

Borrower Paid – Single
This is a one-time fee paid at closing by you or by the home-seller that covers the loan until it is paid in full. For a well-qualified credit scenario, this tends to cost about 1.7% of your loan amount; for a $200K loan, that’s about $3,400. If you do the math, you will see that $100 per month versus $3,400 paid once has a break-even point of 34 months. This means that this option is typically much better than “Borrower Paid – Monthly” if you intend to keep the loan long-term. It’s of incredible value if you can get your seller to cover that cost for you at closing (have your real estate agent talk to me before writing your offer)!

Lender Paid – Single
This is the same as “Borrower Paid – Single” but the lender increases your rate to cover that cost – typically the increase is 0.375%-0.75% in rate depending on the loan amount and the credit-scenario. This is a great way to make your mortgage insurance tax deductible. Presently, mortgage insurance is not tax deductible. If we build it into your rate, it becomes interest and, in most cases, will become a tax deduction for you. Check with your CPA to make sure you can write it off (I have to say that because I am not a CPA)!

Borrower Paid – Split Premium
This is a hybrid of the first and second options above; you or your seller pays a one-time fee at closing of 1% of the loan amount and you then pay a monthly cost of about 0.0275% each month for well-qualified credit borrowers. In dollars, using the $200K loan amount example above, this would be $2,000 one time and about $55 per month.

To get numbers for each of these options for your specific loan scenario, whether you are in Wisconsin or California, please be sure to contact me for more information.

How to Insure a Mortgage

It’s common knowledge that a mortgage loan that has a loan-to-value ratio of greater than 80% (i.e. less than 20% equity/down payment) must be insured in some way. Here in Wisconsin, most of us call this “PMI;” short for “Private Mortgage Insurance.”

What isn’t as widely known, is that there are many ways to insure a mortgage.

Before I get into the many different ways to insure a home loan, I think it’s prudent to tell you what mortgage insurance (MI) actually covers.  In the case of MI, the policy provided covers your lender against your default on the loan.  If there was a default on your loan and the home was sold at auction through foreclosure, the MI would pay the lender back for the difference between the loan balance at the time of the foreclosure sale and the sales price obtained through said sale, up to the limits of the policy.

Different Ways to Insure a Mortgage

Government Options

  1. FHA – 3.5% Minimum Down Payment
  2. USDA – 0% Down; typically available in more rural parts of the Country
  3. VA – 0% Down; for eligible US Military Veterans and Active Service Members

Conventional Options

  1. Monthly (PMI)– This is the most common
  2. Lender Paid (LPMI) – The MI is built into the interest rate instead of being paid separately; this is not very common, yet
  3. Borrower Paid Single (BPSMI) – The MI is paid, by you or rolled into your loan if possible, at closing as a one-time, life of loan payment; this, too, isn’t all that common, yet

The four compared below are PMI, FHA, LPMI, BPSMI.

I have assumed a purchase price of $200,000 with a 5% down payment and I have also estimated taxes and insurance based on Wisconsin averages.  All numbers assume great credit as well.  If a person’s credit is not in the top-categories, the Government Options become much more attractive.

In the image above, you can see the four different options and each of their general differences.  In the following images, we will look at the implications of each.

In this image, you can see that, based on the most expensive monthly option, the FHA program, the monthly savings with the other options can be huge! But keep reading.

In this image, you can see those monthly payment savings compounded over five years’ time.  This also considers the added cost of the BPSMI that’s paid at closing (note in the Summary that the “Cash to Close” is higher…that means the closing costs are higher because you pay the entire mortgage insurance premium at closing, not monthly).

This image is simply an analysis of how much interest and MI has been paid during the first 15 years of the mortgage, including what was paid at the closing.  The BPSMI is still the best option.

Takeways

  1. There are many ways to insure a mortgage
  2. It’s important to consider all of your options as there are clear benefits to each; many of which are credit-score and loan-to-value ratio dependent
  3. It’s important to consider the “life” variables into this equation. For example, will you be selling this home in a year or two? Do you tend to be refinance-happy (i.e. will you get out of this loan sooner than later)?

Each of these options discussed throughout this article has it’s own specific eligibility requirements that are subject to change without notice.  Beyond that, the MI premiums for each of these options can change, also without notice, thereby changing which one is best.

The bottom line is that I highly recommend that you contact me to learn what/if you are able to qualify for; we will look into that for free! Please call me at 262-293-5144 or 800-627-1925, Option 1, Extension 5144 for your free consultation. You can also get started online here for free.

If you would like to see many of the assumptions behind these graphs, please view the TCA for Johny Homeowner MI Summary (PDF Download).