Private Mortgage Insurance (PMI) for buyers with less than 20% down has been much maligned for all too long.
PMI is now, however, so much more competitive that it is often a far better option than the two highly touted alternatives: Lender Paid Mortgage Insurance (LPMI), and 80/10/10 (1st and 2nd mortgage) financing.
PMI is often much cheaper now than it was in the past b/c the major insurers like MGIC now use much more sophisticated pricing models that especially benefit strong borrowers.
PMI vs. LPMI: Why Flexibility Wins
We like PMI better than LPMI b/c PMI can be eliminated after a few years in most cases when a borrower’s loan-to-value ratio falls below 75% or 80%, depending on circumstances. Borrowers can either pay down their loan or petition out of PMI with a new appraisal.
With LPMI, borrowers take a higher rate in lieu of PMI, but the higher rate is permanent; borrowers can’t petition for a lower rate when they build more equity.
PMI vs. 80/10/10: Speed and Cost Advantages
80/10/10 financing is also often inferior to PMI financing for two reasons:
(1) Speed – we can close PMI deals in 15 days, but we need 21 days to close 80/10/10 deals; and
(2) Higher Rates – the HELOC/2nd rates are now higher because Prime Rate is climbing, and first mortgage lenders also often demand higher rates when there is a second mortgage behind the first.
