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.
