Bux-Mont Real Estate and More

Q. What is PMI and how much does it cost?

Q. What is PMI and how much does it cost?

A. PMI is Private Mortgage Insurance and is required by most lenders if the borrower is putting less than 20% down on a property. The insurance is to protect the bank if the borrower defaults on the loan. PMI offers no protection to the borrower.

There are a few different ways to pay for PMI and the requirements vary depending upon the loan type and individual lender programs. A borrower may elect one of the following:

¨ Monthly Premium

¨ Upfront Single Premium

¨ Single Premium Financed (The premium is rolled into the Loan Amount)

¨ Single Premium Lender Paid (The premium is offset with a higher interest rate)

Here are examples of the rates for a borrower with a credit score of 720 or above, putting at least 10% down, and seeking a $200,000 mortgage:

Monthly Premium

Premium is 0.50% of loan amount (0.50% x $200,000)

=$83.33 per month*

*The PMI payments should stop when the equity reaches 20%

Upfront Single Premium

Premium is 1.71% of loan amount (1.71% x $200,000)

= $3,420 which is due at closing from the borrower

Single Premium Financed

Premium is still 1.71%, but the $3,420 is added to the mortgage amount

P&I (principle and interest) payment is now $971.16 instead of $954.83 for the full life of the loan

Monthly equivalent is $16.33

Single Premium Lender Paid

(the interest rate on the loan is increased ~0.50% to absorb the cost of the upfront premium)

Premium is 2.08% of loan amount (2.08% x $200,000)

= $4,160 which is paid for with the higher interest rate

Cost is about $58.54 monthly for the full life of the loan

Is there an alternative to PMI?

A borrower with 10% to put down on a home could do a 80/10 First & Second Mortgage Combination to avoid PMI. However the interest rate on the 10% Second Mortgage is generally higher.

A borrower utilizing a first and second mortgage would likely want to pay off the second mortgage as soon as possible.

 

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The Scott Loper Team

Scott & Lisa Loper

Scott Loper Team at Keller Williams Real Estate

 

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