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PMI (Private Mortgage Insurance); why you need it and the different types of PMI……

homes

I was reading through some blogs over the weekend and Mark Flanders Silverdale did a blog that gave definitions of PMI. What is PMI and can it be avoided. This can be such a confusing and sometimes misleading concept of why you must have mortgage insurance.

As Mark Flanders discussed, private mortgage insurance is not there to protect you, but to protect the lender in case of default. And the old rule is that you must have 20% or more down on the property to avoid this specific cost. I am only going to discuss the different types of mortgage insurance for conventional loans only. In regards to FHA and VA loans, they have their own types of mortgage insurance. And keep in mind, once you reach the 78% LTV mark, the lender has to drop the mortgage insurance. It's not the typical 80% mark that many would think, but this is if you opt to include mortgage insurance into your monthly mortgage payment. And sometimes another reason to avoid mortgage insurance would because the PMI company would underwrite the loan over again, after the lender looks at it. Depending on the difficulty of the loan, this might stop you from getting your dream home. For more details, please consult your loan officer or lender.

Here are the types of mortgage insurance: (and I will show examples of each type below)

Monthly mortgage insurance. The biggest and easiest mortgage insurance commonly used is the monthly paid insurance by the client. The larger the down payment, the less your monthly mortgage insurance would be.
1st & 2nd mortgages combined. This next example is not necessarily mortgage insurance, but how to avoid it. This would be known as a 80/10/10 or 80/15/5, depending on how much you have to put down. And this might not always be the best way of avoiding PMI because you will have 2 mortgage payments. Another reason would be because you might not save as much in the payment, depending on your goals, which will be illustrated later.
Lender Paid Mortgage Insurance. This is where the lender will pay for your mortgage insurance, but by giving you a higher rate. This is not always a bad thing, depending on your goals and how long that you will be in the house. One reason is because your payment would be lower, even though your rate would be higher. Usually about 3/8% to ½% higher. And another positive reason is because you will have a better tax write-off.
One-Time Financed mortgage insurance. This is one of my more favorite ways of avoiding mortgage insurance. Again, this will depend on your goals in regards to how long that you will be in the house and depending on your loan amount. This can affect the total savings. But what takes place here is that you get a very large discount in regards to your mortgage insurance. It gets added onto your loan amount, it doesn’t affect your LTV, and you also get a better tax break and write-off because your loan amount will be higher.
Last, there are 1 to 2 more ways to avoid PMI, but they are more complex and aren’t the best solutions. One of these options is called half and half. You pay half of your premium upfront and the other half monthly. The first 4 are your best options out there.

PMI-saving money

Below is an outline of what I have discussed by using examples. In these examples, the client will be putting 10% down on a $250,000 property. Their loan amount will be $225,000. When shopping, don’t forget that you need to compare the same closing costs for each scenario. In these scenarios, let’s just assume they are with no points and no closing costs, trying to keep it simple. And that these are 30 yr fixed rates. But these examples with show how to save you money, leading you to a better savings in regards to your home.

2 loan amounts Financed PMI rate 2.10%

$200,000 & Financed Amt $ 4,725

$ 25,000 New Ln Amt $229,725

Type of PMI Monthly PMI 80/10 1^st & 2^nd Lender Paid PMI Financed PMI

Interest Rate 6.50% 6.50% / 8.00% 7.000% 6.50%

1^st 2^nd

Payments

Monthly P & I $1,422.15 $1,264.14 + $183.44 $1,496.93 $1,452.01

payment

Monthly PMI $ 144.38 0 0 0

Total monthly

Payment P & I $1,566.53 $1,447.58 $1,494.93 $1,452.01

(not incl. taxes This scenario is

& homeowners) based on if you do

the 2^nd mtg as a 30 yr,

not as a 15 yr.

Even though scenario # 2 is the cheapest, it’s hard to compare because it all depends on what you can get as a 2^nd mortgage rate. And the difference between this scenario and # 4 is $4.43 difference. In regards to the financed PMI, scenario # 4, you are now writing off the interest on the full loan amount and that you received a hefty savings just in the mortgage insurance itself.

***But again, each scenario is there for different reasons and each client is different. Please consult your loan officer or advisor. Like I said before, my main concern is knowing my clients goals in order to help give my advice to which is better suited for you.***

If you ever have any questions, please don't hesitate calling me for information on this.

Jeff Belonger 888-835-1663 e-mail: jbelonger@nationalfuturemortgage.com

Posted by Jeff Belonger -- The FHA Expert.com -- FHA Loans -- FHA mortgages - USDA loans on 11/05/2006 01:52 PM

Comments (31)

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31 Comments on PMI (Private Mortgage Insurance); why you need it and the different types of PMI……

NOV

2006

Jeff, great follow up. I was just thinking this morning I needed to get back to this subject. Thanks to you, now I don't have to. I'll just add your article to my list of information tools.

Thanks, Mark

Mark..... my pleasure.... thanks for stopping by. If I missed anything, let me know. I need to go back to read your 3 new blogs. I didn't have time yet. thanks again.

Jeff,

Good stuff. Suggestion - when using charts, keep the pictures away from the charts and use shift+enter for carriage return to drop only one line. Just my 2 cents on presentation.

Jeff,

Not too many are really interested with PMI explanations or calculation, but this is very important subject, and thank you much for this article.

Eli, www.AbsoluteFloridaMortgage.com

Robert...... thanks for the compliment. And yes, it was hard to incorporate what I had down on paper and put it into a format or chart that was easy to read.

Eli.....my pleasure. And to get back to the reason why so much of the general public aren't really interested in explanations or the calculations is because it starts with the loan officer educating the clients. If the clients doesn't know that there are options, then how do they know to ask? They just hear if from friends and family members.

I spoke with 3 different clients in the last 2 months that had quotes from other lenders. Each of these clients were putting 10% down. I was able to save each one of these more money and to reduce their monthly payment. My best savings was $106 a month. I am sorry, but that is a savings of $1,272 a year and within 5 years, they would save $6,360. That might not be much to some people, but to the average person, that is a lot of money.

Again... if the client doesn't know about this and the loan officer that they are dealing with doesn't ask the appropriate questions, how does the client get the best deal. This is where shopping for a mortgage can be dangerous at times.

And I wanted to add something to this, if there are anyone from the general public that has gone through this or is going through this.

The old way was too put 20% down. Your parents might tell you to do this. But there are so many ways to get your payment close to what it would be with 20% down, but by putting 10% down, because of these PMI plans. And what this does for you is free up another 10% that you wouldn't have had in the first place.

This subject can get detailed and I have seen a lot of lenders that don't get the concept or that seem to mess up the firgures when they do this. You need to know what you are doing when it comes to these scenarios. Just FYI.

Jeff, I don't know of a Borrower that does not initially balk at the idea of paying PMI, and the first words out of their month is an 80/20. A lot of times an 80/20 is the wrong thing for them, and after I explain the difference between the two, they realize that the 80/20 is necessarily the best thing for them. 80/20's have there place but not always the best option.

You hit in on the head, in saying that the options have to be explained, because not everybody’s situation is the same. Good job.

Seems that our buyers this year have been from feast to famine.

They are either cash buyers or 100% financing. The 80/20 is VERY popular. I'm anxious to see the 100% FHA get off the books too.

Thanks Jeff.

As usual, wonderful information. I would like to print this up and use it in my Buyer information packets. Or would you put it on your letterhead with all your contact numbers?

Tammy J. Pelletier, GRI, Residential Properties Ltd., Cranston, RI

George....... 80/20's are good, if you don't have ANY money. If you have some money, they aren't always the best.

In regards to your second comment....yes, it comes down to explaining to the client. EDUCATING the client.

I had one client about 1 year ago that was trying his hardest to get around the mortgage insurance and not to pay points. It was all because of what his father said....not suggested, but told him his way, which was correct....when he bought his house back in the early 80's. Different times. After explaining to him a few different options, he was elated to what he learned. He went back to his dad and showed him how to save more money.

Lenn......you are correct, I don't see as many clients in the middle any more. On my side of things, it's 100% financing or 20 to 30% down. The reason for the 2nd is that these are clients that are moving up. They have equity from the house.

In regards to the 100% FHA program. I can't wait. I wish they would stop talking about it. It's been about a year since they mentioned this. And every 3 to 4 months, you hear a rumor that it's around the corner. I guess they haven't stopped rolling the dice yet. lol

Tammy......thanks for the generous compliment. I would be glad to get this out to you in the mail. Give me about 5 business days. I'll call you tomorrow.

Jeff, naturally I agree that educating the borrower is a must. My comment was really directed to most of the public...when I say to a borrower, that I'm going to save him the PMI, by doing such or such...and here are some other options/programs, etc. usualy he is happy, but denies me to go deep into explanation or calculation...all he cares about, that he is saving money.

Eli

Since I am a land specialist, I may be not so familiar as most on PMI and such. Thank you for sharing your experience and wisdom. I appreciate your generosity...

Just think there was to my knowledge no PMI in the 70's and buying a house was much harder. Amazing what is avalible for your clients now.

Eli......interesting. I usually find, once I give the client the options, that they won't me to go into detail. Maybe it's a way I bring it to the table.... that they are so interested, that they want to spread the word also. But I have seen clients go either way. Either they say, just give me what's best for me.... or, can you explain it to me again? What's your opinion? etc etc

JaneAnne...... my pleasure and if you ever have any questions, please call me or write to me.

Susan....... we will leave that one alone... lol I was in single digits at that time....until the late 70's.... ;o) But yes, times have changed, big time.

Tommie...... thanks again for a great compliment. I see this in both refinances and purchases. More lenders don't worry about the options when it comes to the refinances. I think part of the reason is because they don't have a realtor and or lawyer looking over their shoulder. It's sad, but I bet true. And this is not because of the people. When I did do a PMI loan, I explained to the client what they had to do. But they have changed the PMI laws since then. thanks

Great information on something that comes up all the time in our busiess. Our mission is more than getting a deal. It is getting our client the best deal which includes the best loan for them.

Really appreciate an honest perspective.....thanks for all the good information!

Linda Mary

Chicago, Illinois

Jeff....... thanks for the compliment. Are you a member?

Linda..... thanks for stopping by. I actually love to be creative and to show clients how to beat the system. You might say that banks and lenders don't like me as much..... ;o)

If you happen to get this, don't ever hesitate to write to me or call me. I am also licensed in Illinois. Actually, I just got off the phone about 30 minutes ago with my Uncle who lives in Chicago. I was trying to call my Aunt, who loves the Packers. My Uncle loves the Bears. Both didn't fair too well today.

NOV

2006

Excellent post and timely subject. I don't think I've had a client walk into my office within the last two months that had a downpayment, let alone the 20%. This time of year we are often serving those cash strapped first time homebuyers.

Isn't there a difference in tax treatment of PMI versus mortgage interest on a second mortgage? How does that factor in?

PMI will be used more and more in the next 2-3 years. It will be interesting to see the 60% of the people who have been in the business less that 5 years learn it.

Great post Jeff. Even though it is time consuming, I run the 4 different scenarios for every loan that requires PMI. I then tell them I have 4, but give them the best two. I don't want to loose their interest with too much information. However, I will supply all four if requested.

Suzanne,

Regarding tax treatment, yes there is a big difference. For the majority, this would be the answer...

PMI paid as such on a monthly basis is not tax deductable.

If it is paid as LPMI (Lender Paid PMI) then you will have a slightly higher interest rate, resulting in a slightly higher monthly payment, but it will be tax deductible since it is mortgage interest.

The other option is to finance the upfront PMI, which means you can deduct the interest on the financing (higher loan amount) of PMI, not the payment itself.

The best way to find out which is best for your situation is to seek proper guidance. That includes mortgage planner and I suggest consulting your tax advisor. Regarding an indiviudal's situation, the deduction may not be enough to warrant itemizing, the individual may hit the AMT limitation which negates all or at least some of the deductions as well.

I hope this helps. If you need more information contact me

Grerat blog goose couldnt of been said better. PMI isnt necessarily a bad thing your blog totally exemplifies this. LPMI rates are too high.

Chris...... thanks for the compliment. Bascially what I wanted to do with this post was educate the average client. Yes, we have seen a large part of this business be the 100% financing or the 80/20 loans. But like Brian Brady said, when this starts to come back into play, it will be interesting to see how loan officers or the lenders advise their clients.

In one of my examples, I talked about a lender that gave my client a good faith estimate just based on monthly PMI. When I started to explain the other options, he tried to tell the client that these weren't good options for them. LOL Sorry, but probably because he was scared to lose the client. And the first thing out of many sales peoples mouths are negative comments towards their competitors. I hear it often.

Suzanne....... good question and Robert Ashby did a good job of describing the basic knowledge of tax write offs. And since we aren't accountants, it best to always consult them.

In regards to the 80/10, 1st and 2nd mtg programs. You are writing interest off on both loans and even at the higher interest rate. But if you do all the math, on both the 80/10 combo and the One-Time financed PMI loan, you will come out better on the financed PMI loan. Your first rate is so much lower and the fact that you receievd at least a 50% discount on the mortgage insurance. The reason this becomes a better program is because you have to factor in the Amortization schedule of both loans. THIS IS KEY. You will notice that your principal will be lower than the combo loan. I hope this helps. I know it's long, but # 4 will usually be proven to be better, but again, depending on your goals.

Brian..... Good point, in regards to what loan officers will say and do. So many of the loan officers and lenders are used to the 80/10 loans, the 80/20 loans, and the sub prime loans that don't require mortgage insurance. They don't know how to consult and advice their clients on the other options.

What will be sad is that the client themselves won't know their options. When the lender says...this is my best recommendation. How does the client know? This is the part of the business that I love. To be creative and give other options that weren't presented to the client. That is how I get some of my business. The last time I was competiting for a client in regards to the PMI issue, was about a month ago. I think I had the loan officer scared that he was going to lose the deal, that when he gave the client a new good faith, he forgot the monthly PMI ... LOL Whoops I told the client that this rate was impossible with no mortgage insurance. She called the lender and after a day of calling him, he sent a revised good faith with the PMI and said he was sorry... LOL

Ann....... thanks for the compliment. yes, this can be time consuming when figuring these options out for the client. But if I didn't do this for them, then they wouldn't be getting the true and real advice that I am getting paid for. EDUCATING your client...and KNOWING your products.

Robert...... thanks for explanation there. Good job....

Eddy....... thanks for the confirming this topic and my examples.

Who pays PMI anymore? Out of all my transactions this year I think I had one have to pay it. 80/20s are now the way to go.

Jennifer.... thanks for the comment. I am just asking this question for conversation purposes. But you said... "80/20s are now the way to go" Just curious, who says they are the way to go? The one main positive is that they don't put any money down. That we can understand. I read your profile and it states that you are a realtor.

Two things....

1. Because of house values and how they are holding steady and declining in some markets... god for bid something happened to where they needed equity money quickly, they won't have it. Or they need to sell soon and they actually owe more than it's worth. This might just seem like a small tid bit to some.

2. In regards to the 80/20's. Even if they put 5% down, they will get better rates and better programs. With 10% down, they basically can choose almost any loan program out there....yes, depending on their credit scores.

This is where that statement comes down to the fact that every client is different. Not one are in the same. And this is where we as loan officers need to know the goals of our clients. And this is where an accountant or financial planner would make sense to these clients....meaning.... hey.... what could you do with that 10% and make money with it. Or. hey, your payment is going to be $250 less because of the 10% down and because the lender got you a great program in regards to the mortgage insurance.

What could that money mean to a family of 4? And that 10% down that they do have might have been in a 401-k.... or a gift...

I semi know what you are thinking....but to say that 80/20's are the way to go? It's just like the loan officer stating when asked about PMI... "hey, monthly PMI payments are the way to go" And they might be saying this because this is the only way that they know of. Just like people and realtors knowing that 80/20's are out there.... but to say they are the way to go? Again...it also comes down to credit scores and such....

Last,... maybe the lenders aren't showing these clients their options? The rate on a 2nd mtg will be higher also..... just an FYI.

Thanks for sharing...

Jeff,

I agree with you. There is no "one size fits all" loan program. 80/20s may be the way to go for some, but for others it would hurt them in the long run.

You mention a few reasons, but as you know, there are many more reasons that could prevent the 80/20 from being the best option. Even using LPMI, the after tax cost may provide a better solution. Paying lump sum PMI may even be a way to go. It depends on the borrowers' situation.

In a recent report by the Federal Reserve Bank of Chicago, their study showed 38%+ could benefit from doing things differently. I leave the plus in there because the study only covered some of the basics, not every situation.

As I have said before, 80-90% of my business comes in part due to the fact the borrower was in the wrong loan program from the beginning. I mention this to point to the fact that any approach as "the way to go" is doing the borrower a disservice.

Robert.... thanks for sharing. There are some good points here.

The basic issue is that everyone is different..... each person has different goals. And I consider it my job to help educate them in choosing the right program. And not just do it for them because..."it's the way to go"...

Maybe I am just extremely passionate in what I do also. And.... wanting to treat those the way I would want to be treated. Something simple, but something not practiced often.

DEC

2006

Here is some more great information that you have supplied to the general public.

Neil.. thanks for stopping by and welcome.

MAY

2008

I've been reading your posts and have already learned a great deal! I am just an average investor, very new to the game, and had no idea that there were so many finance options and scenarios.. Looks like I have one of those lenders that does not see it fit to provide options and education... to make a long story short... It's nice to know that there are good people out there that are still looking out for the clients best interest.. Thanks all!!

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