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Fishers Realtor explains Private Mortgage Insurance

Real Estate Terms explained You typically will see PMI applied when you have less than 20% equity (mortgaged amount is more than 80%). The misnomer I often see is that people interpret that to mean they need 20% down in cash. There are other ways to ensure the 1st mortgage is at 80%; by taking a 2nd mortgage for say 10% and then the balance of 10% is in cash. The 2nd mortgage will run a bit higher on an interest rate, but some people prefer to pay that off quickly and avoid the PMI charges completely.

Or course, a 2nd is much harder to come by these days. A credit score over 700 is expected.

When you purchase a home with an FHA loan; PMI is automatically attached regardless of the amount put down. It is typically .55%. This is true if you have a 30 year FHA loan; PMI would not be required on a 15 year FHA with 10% or more down. (thanks David!)

PMI costs vary greatly, they can be as low as 1/2 % of the mortgaged value to 1.00%. Here is an example of how this might work:

A buyer searching in the Fishers Real Estate market might find a home in Sunblest for $139,900. Their Fishers Realtor® negotiates the price to $133,000. The buyer puts down $13,000 leaving a mortgage of $120,000. Lots of numbers, I know...stay with me. The PMI is 1% of the mortgage balance or $1,200 or an extra $100 a month.

Here's a bit of good news, PMI is now deductible up to $1,000 a year.

It is important to understand the "Total" monthly mortgage payment. Often calculators on various websites give you an amount that is JUST principle and interest. You must also include property taxes, homeowner insurance and PMI (depending on your loan) and possibly a monthly maintenance fee if you are buying a condo or choose a home in a low maintenance community.

If you have other questions about PMI or other real estate lingo, please let me know. I am here to help you understand the buying and selling process. More real estate terms defined here.

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Cindy "in Indy" Marchant - Fishers Real Estate Agent
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Posted by Cindy "in Indy" Marchant Carmel, and Fishers Real Estate on 09/06/2009 07:48 PM

Comments (21)

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21 Comments on Fishers Realtor explains Private Mortgage Insurance

SEP

Thank you cindy, I did not know about the $1,000 deductible per year on PMI, that is a new one for me. I appreciate the information, good post. that is why I believe Realtors should do real estate and loan officers should do loans, period, those are two very different fields.

Antonio

I also didn't know about the PMI being deductible up to $1K a year. Also, good point about the website calculators just showing P&I. Can't forget those 'little' addons like property taxes and homeowners insurance.

SEP

Good information Cindy.

I keep forgetting PMI is now deductable.

This was the reason some folks stopped using FHA during the boom.

Remember that PMI deductibility is limited by income as well. The deduction phases out as the taxpayer's income increases.

Families with adjusted gross incomes of up to $100,000 can deduct 100% of their insurance (PMI) premiums, much the same as they deduct property taxes. The deduction is then phased out up to an adjusted gross income of $110,000.

Cindy,

Just a few corrections to make in your blog.

You typically will see PMI applied when you have less than 80% equity. - You typically will see PMI applied when you have less than 20% equity is the correct statement . Equity is the difference between the price for which a home could be sold (market value) and the total debts registered against it. Therefore if the sales price was $100,000 and the homeowner had 80% equity he would have a loan for $20,000.

When you purchase a home with an FHA loan; PMI is automatically attached regardless of the amount put down. It is typically .55% This is true only for a 30 year fixed FHA mortgage. The PMI isn't required for a 15 year fixed FHA mortgage with equal to or greater than a 10% down payment.

It is important to understand the "Total" monthly mortgage payment. Often calculators on various websites give you an amount that is JUST principle and interest. This is an excellent point.

This is a great topic! Thanks for sharing.

Super useful information. Thanks for sharing.

I personally feel that PMI is a rip off. It inflates the mortgage payment and can actually put a clients debt to income ratio out of balance and cost you a sale. I would like to know what the payout for this so called insurance is...It is also very hard to have removed.

I did not know that 1K of PMI was deductible! Thanks for the info!

The vast majority of loans in our area are VA loans, so PMI doesn't come to the front of the brain when I see that someone is using an FHA loan. Thanks for the reminder... I'm making a point to be more on top of this. Great info, including the tax tips!

Thank you. I didn't know PMI was deductible.

I always thought pmi meant the banks were protected against everything over 80% from insurance. My thinking is the banks are getting that money and still listing foreclosures for too much money. In maine im doing alot of rural development loans, 100% financing and no mortgage insurance.

80-10-10 loans are just coming back in limited form for owner occupant only. Not everyone is doing them.

Thanks for all the comments; David...I made your corrections, thank you for those!

Good synopsis on PMI. Another nice feature of FHA loans is on a 15 year FHA with 10% down, there is no monthly mortgage insurance. Upfront mortgage insurance still applies but no monthly.

Very nice "long tail" blog post, Cindy. Perfect example of how to do it right.

Wow! Cindy "in Indy"! I even managed to make it in the actual article. Thank you so much! The article looks terrific.

SEP

Thanks for letting me know the PMI was deductible up to $1,000. Can you provide us with a link where that is allowed? I've never heard that before.

Good point Cindy, about how to get around the all cash 20% down with the 2nd mortgage. Most buyers without consulting a loan officer don't even think of this.

Cindy,

FHA also has an Upfront Mortgage Insurance Premium (UFMIP) which is an additional 1.75% of the "Base" loan amount is is almost always financed. I think this is how FHA can get away with only charging .55% on their monthly mortgage insurance. I have yet to see anyone pay the UFMIP in cash in all the years I've done FHA loans.

To the poster who said PMI is a ripoff, I don't agree. PMI came about in order to allow people to buy homes with less than 20% down. In exchange for the added risk a lender takes going above that, they get an insurance policy from a private mortgage insurance company. There is a cost for this insurance and the lender has the borrower pay that monthly premium in exchange for putting less than 20% down. Without PMI, there are millions of homeowners who never would have been able to buy a home over the years.

I just had a deal go "bust" and the reason was disapproval of PMI. We are all scratching out heads over this. Buyer was prequalified on his income alone for the purchase price, then the lender required co-borrower income verification then disapproved the loan citing unable to approve PMI. I'm thinking this lender gave a bogus pre-approval in the first place and the borrower was very marginal. Where is accountability? Title work was completed and expenses incurred as a condition for final approval on the loan then this!! I don't get it. Can anyone shed some light?

Per my lender, here is the link that explains that PMI is deductible at least through 2010.

http://turbotax.intuit.com/support/kb/tax-content/tax-news/5678.html

Hope that helps, and thanks for all the great comments. I've been gone from the Rain awhile, life gets busy and am thrilled to see all the comments for this post!

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