10% Down With No PMI; Overrated

    Most agents and buyers know that Private Mortgage Insurance (PMI) is usually necessary when a buyer puts less than 20% down.

    What most people don’t know is that almost every lender offers a “10% down loan with NO PMI,” even though loan officers often market these products as “unique offerings.”

    10% down with no PMI is not only NOT unique but such loans are often NOT in the best interest of buyers.

    PMI, once again, is insurance that lenders require borrowers to purchase when they have less than 20% equity.

    The insurance only protects lenders in the event of a default and not buyers.

    PMI can be paid in a single, lump sum upfront payment, or it can be paid in monthly installments (the more common way).

    When lenders offer “No PMI Loan Options” for loan-to-value ratios above 80%, they merely increase the interest rate to capture more commission or yield premium, that they then use to purchase “lump-sum or single payment PMI.”

    Interest rates for no PMI loans are 0.25% to 0.625% higher than they would be for loans with PMI.

    So, while borrowers with less than 20% down avoid PMI when they obtain a “no PMI loan,” they are stuck with the higher rate for the life of the loan no matter how much equity they accumulate.

    If borrowers instead opt for a lower interest rate with PMI, they can get out of the PMI obligation in a few years (when equity accumulates) and then enjoy a lower interest rate for the remaining life of the loan.

    (Here is a short blog that explains how borrowers can eliminate PMI)

    For very strong borrowers, the monthly PMI option is even more enticing now that PMI companies are competing so aggressively with PMI rates.

    Three final notes/reminders:

    FHA: For FHA borrowers, monthly mortgage insurance is always required; there are no lump sum or single payment options.

    Seller Credits to Pay for PMI: Sellers can also pay for the single payment with seller credits, although seller credits are hard to come by in many markets.

    Tax Deductibility: PMI is not tax deductible like interest is, in most cases.

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    Jay Voorhees
    Founder/Broker | JVM Lending
    (855) 855-4491 | DRE# 1197176, NMLS# 310167

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