EHLA - Understanding Mortgage PMI

Typically you will need to put down 5 - 20 percent of the purchase price to qualify for a conventional loan. If you put down less than 20 percent, you will have loan options with and also without private mortgage insurance (PMI).

Recently more lenders are offering low-down-payment programs with very good credit and debt-to-income ratios.

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Mortgage PMI: Making Sense of PMI Options
If you purchase a home and use less than a 20% down payment your lender will require you to have some form of private mortgage insurance (PMI). This insurance protects the lender should you default on your mortgage. While it does represent an added expense, it shouldn’t deter you from investing in home ownership. Below are simple explanations of your options and ways to minimize your PMI costs.

There are two basic kinds of PMI. Regular PMI is mortgage insurance provided by a third party company and is paid as a fee every month until your equity exceed 20%. LPMI is Lender Paid Private Mortgage Insurance that comes in the form of a slightly higher loan interest rate. So, both kinds will cost you money every month but that expense is different over time. Having a realistic estimate of how long you’ll own the home you’re buying is very helpful in determining which one is a better deal for you.

PMI Versus LPMI Example

You buy a home for $400K and put down 5% ($20,000)
You estimate you’ll live there for 4 years
Your loan is $380K

Regular PMI with a 4% interest rate comes to $1,814.18 principal/interest + $129.84 PMI.
Monthly Total = $1,944.01
LPMI makes your rate 4.25%, so this becomes $1,869.37 in principal / interest only.
Monthly Total = $1,869.37

If you own your home for 4 years the LPMI option will you cost $3,582.72 less and you your monthly payment will be smaller. Alternately, if you live in your house longer than 7 years + 10 months the regular PMI option will begin to save you money.

Admittedly, it can be difficult to estimate how long you may live in a house, but that info will influence what type of Private Mortgage Insurance is a better option.

Patrick Furlong founded EHLA in 2011 despite the challenging economic times. ELA use a more direct approach to providing better value, options and service for customers.