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Mortgage Insurance Bad or Good?

By
Mortgage and Lending with Ann Arbor Mortgage

 

I have been a mortgage lender since 1995 and have heard every negative comment, story, rant, and opinion about Private Mortgage Insurance (PMI).  I never really understood why people had such strong negative opinions about PMI.  I would, from time to time, try and explain that without PMI most people wouldn't have been able to buy there first home.  Mortgage insurance, in my humble opinion, is great.  That's right I said great.  Without PMI I would never have had the ability to buy my first home, which would also have stopped me from buying my second home.  Yea, sure I didn't like paying for it every month but I also didn't like paying the interest on my mortgage.  Come to think of it I don't like paying the light and heat bills, greens fees, gasoline, or most bills.  However without them I would be sitting in a cold, dark cardboard box dreaming about the days long ago when I played golf on Sundays instead of digging through dumpsters for dinner.  Ok my rant is over. 

For the past five years I would rarely close on a home loan that had PMI.  With the availability of Two-step or Piggy Back loans (the 1st mortgage for 80% and the 2nd  loan for 5%, 10%, 15%, or even 20%) the PMI option was more expensive.  Well with the Sub Prime meltdown that has been changing quickly.  Many of the nation's largest mortgage lenders have closed there 2nd mortgage operations which makes it difficult to find inexpensive 2nd mortgages.  Over the past six months I have found that more time then not when I run the numbers for a client, offering them a mortgage with PMI is less expensive then doing a Two-step loan. 

Below I have explained the four types of PMI offered for conventional loans.  I hope you find this informative.

 

Monthly Paid PMI is considered the old standard and most commonly used PMI option.  Monthly PMI charges a fee every month for the first five to seven years of the loan.  After the five to seven years (which is the amount of time required to pay down the loan to less then 80%) the PMI payments stop.  The amount of time before the PMI payments stop depends on the amount of down payment made when the loan was made as well as if any extra principle payments were made.  The amount of the monthly PMI payments depends on the amount of the original down payment as well as the credit score of the borrower.  This monthly fee is based on a percent of the loan amount.  The more down payment made will reduce the percentage.  Wither or not the PMI payments can be tax deductable will depend on the income level of the borrower.

 

Lender Paid PMI is were the full amount of the PMI is charged at closing and the lender pays the premium. The lender in return provides the client a slightly higher interest rate to recoup the cost.  We have found in most situations this option has the lowest monthly payment and lowest total expense then other PMI programs.  Lender Paid PMI also has the benefit of being completely tax deductable for all borrowers regardless of income.   While this program has been available for many years it has only recently become popular because of the diminishing availability of good equity loans for Piggy Back loans (one mortgage loan at 80% and a 2nd mortgage loan at 5%,10%,15% or 20%).  The adjustment to the interest rate for this program depends on the down payment made, the borrower's credit score, the loan program, and the loan amount. 

 

Single Premium PMI is very similar to Lender Paid PMI in which the full amount of the PMI is charged right at closing.  The main difference between these two programs is who pays the fee.  With Single Premium PMI the barrower is responsible for the fee.  Once this up-front amount is paid at closing, there are no monthly charges.  This program is very rarely used because the other options tend to have lower costs.  The amount paid for the policy is used up over five to seven years depending on the down payment.  If the loan is paid off sooner then the allotted time then a portion of the premium is refunded back to the borrower.  In most cases, and especially in our current market, the Lender Paid PMI is usually the better option, however in certain situation the Single Paid Premium should be considered.

 

The forth and perhaps least used program is a combination of the Monthly and Single Paid PMI programs.  This program has both an upfront fee at closing and a monthly fee for the first five to seven years.  Both of these two fees are lower then other programs however to total expense is higher then any of the other options. 

 

I believe that, at least for the near future, PMI will play a larger roll in the real estate financing picture.  So for all of you PMI haters out there I recommend you put aside your for-gone conclusions and look at all your options.  You just might find that if you don't have a 20% down payment then using one of the above PMI programs will be the least expensive way to get into that dream home. 

 

David Crisp

Senior Loan Officer

Ann Arbor Mortgage Company

Mark Miller
Ann Arbor, MI
Mortgages in Ann Arbor

Nice post, David.  It is very true that with 2nd mortgages becoming more costly over the past year, that PMI is more attractive.  Most borrowers aren't even presented with LPMI, SFMI, or Hybrid options.

I wanted to get your take on what you've seen with the PMI companies themselves pulling in the guidelines.  What have you heard?  Any idea where it's going?

Mar 06, 2008 06:54 AM
Elizabeth Martin-Ann
Edward Surovell Realtors - Ann Arbor, MI
Arbor, Michigan Realtor, ABR
Thanks for your post, David!  I work with a lot of first time home buyers (and my husband and I are looking to buy our first home this year), and your explanation about PMI is very helpful!
Mar 16, 2008 01:47 AM
- -
- - Bogota, TN

Thanks for you for taking the time to comment on this subject in the Active Rain network.  AR is the new "cyber backbone" of the industry, and with it's uplink to Localism.com it is transforming the real estate marketplace. Agents who don't see which way the cyberwind is blowing are going to find themselves at a considerable disadvantage inside of three to five years.

Jul 11, 2008 02:30 AM
Anonymous
Bad Credit Mortgages

 Thanks David. Actually i want this king of artical. It is really help me in my work and i think its good for many people which is realted to this  feild. Thanks again.

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Mc lee

 

Sep 03, 2010 06:23 AM
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