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“PMI” or “Private Mortgage Insurance” Explained (Briefly)

"PMI" or "Private Mortgage Insurance" Explained (Briefly)

PMI remains a great option for high-LTV financing in 2019, and all too many borrowers and agents do not fully understand how it works.

First of all, PMI protects lenders (not borrowers) in the event of default. So borrowers with PMI will still be on the hook or liable for their mortgage debt even after PMI steps in to make the lender whole.

Buyers with conventional financing are usually required to obtain PMI when they put down less than 20%.

The word “Private” in PMI distinguishes it from just “Mortgage Insurance” or the “MI” that is required for FHA/”government” loans.

FOUR WAYS TO MAKE PMI PAYMENTS.

  1. Monthly Premiums. Borrowers pay a monthly premium as a part of their mortgage payment until PMI is no longer required.
  2. Lump Sum Premium. Borrowers pay their entire premium with a single payment up front (so there is no monthly premium). We don’t recommend this though b/c the premium is not recoverable if a borrower refinances or sells in the near future.
  3. Split Premium. Borrowers pay a combination of a lump sum and a smaller monthly premium.
  4. Lender Paid. Lenders offer borrowers a higher rate and then use the extra yield premium or commission from the higher rate to pay lump sum PMI on behalf of the borrower. We don’t recommend this very often either b/c borrowers are stuck with the higher rate for the life of the loan. With monthly PMI and a lower rate, however, borrowers can eliminate PMI at some point (Monday’s Blog) and then enjoy their lower rate for the remainder of the loan.

HOW TO ESTIMATE PMI PAYMENTS?

I recommend the rate tables on MGIC’s excellent website b/c they are so easy to read.

Example:

$500,000 Loan; 10% Down; 760 FICO: PMI is $117 Per Month

$500,000 Loan; 10% Down; 740 FICO: PMI is $158 Per Month.

Note: PMI rates are affected by FICO scores, down payment %’s, and debt ratios among other things.

PMI IS A GREAT OPTION IN 2019

  1. PMI payments are often much lower than people realize.
  2. Borrowers can eliminate PMI with a variety of options (discussed in this blog)

FHA – BETTER OPTION FOR BORROWERS WITH LOW CREDIT SCORES

For borrowers with lower credit scores and smaller down payments of 5% or less, FHA financing, with lower interest rates and lower FHA MI rates, is often a much better option.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646