There are 3 ways to avoid monthly Private Mortgage Insurance (PMI) when a down payment is less than 20%: (1) Combo Loans; (2) Lump Sum or Single Payment PMI; and (3) Lender Paid PMI.
Combo Loans employ 2nd mortgages to cover the loan-to-value portion that is over 80% (eliminating the need for PMI). We can now do combo loans up to 95% Combined Loan to Value (CLTV). The drawback to combo loans is that they take us 7 days longer to close (21 days in total) and first mortgage lenders increase the rate slightly when there is a 2nd behind them.
Lump Sum or Single Payment PMI is a payment of a single sum at close of escrow to permanently cover PMI with no monthly PMI payment required. We discourage this option typically because if a borrower refinances within a few years of purchase, he will not get his Lump Sum PMI reimbursed. B/c homes have been appreciating so quickly in recent years, most borrowers have been to able to refinance out of PMI relatively quickly.
Lender Paid PMI is a feature where borrowers take a higher interest rate in lieu of PMI. Lenders use the excess yield premium generated by the higher rate to effectively make the Lump Sum PMI payment on behalf of the borrower. Borrowers often think they are getting a great deal with Lender Paid PMI b/c they are avoiding PMI, but they are really just getting stuck with a higher rate for the life of their loan no matter how much their home appreciates. We often discourage Lender Paid PMI too.
We like Monthly PMI the best because borrowers can either refinance out of it without having to eat up-front costs, or they can opt out of it in a few years when their homes appreciate; they can then enjoy a lower interest rate for the remaining life of the loan. In addition, monthly PMI rates have fallen in recent years, especially for strong borrowers, making it a much more affordable option in any case.
Jay Voorhees at (925) 855-4491
Real Estate Broker, CA Bureau of Real Estate, BRE# 01524255, NMLS# 335646