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Private Mortgage Insurance for low down payment loan

Posted on: 30th Mar, 2004 11:12 pm
Private mortgage insurance (PMI) is an amount paid by a private insurance company to a lender in order to prevent losses, in case a borrower defaults on his mortgage payments. When a borrower pays less than 20% of the appraised value or sale price as the down payment on a house, he is required to pay the costs of this insurance. In other words, if the ratio of the loan offered and the appraised value of the property, that is, the loan-to-value ratio or ltv ratio is more than 80%, then a borrower has to pay for private mortgage insurance.

For example
, Sarah wants to buy a house of $1,00,000. She takes a mortgage loan of $90,000 from David. Since the loan value is 90% of the property value and the down payment is only 10%, so she will have to pay for private mortgage insurance. In case she fails to make monthly payments in time, the insurance will pay David on behalf of Sarah.

Features:
  • The PMI charges depend on the amount of down payment and loan to value ratio.

  • The mortgage insurance premiums are tax-deductible.

  • A part of the private mortgage insurance premium is paid at closing and the rest is included in the monthly mortgage payment.

  • A borrower has to pay these insurance premiums until the home equity increases to 80% of the property value. But in case of mortgages insured by the Federal Housing Administration, the private mortgage insurance is to be paid throughout the loan term.
Benefits:
  • Private mortgage insurance helps a borrower to take a mortgage with a down payment as low as 3% or 5%.

  • It helps lenders from losses in case the borrower fails to make monthly payments on the mortgage.
Most of the mortgages require the payment of mortgage insurance premiums but there are some conditions under which a borrower may get rid off it. One way of doing it is to accept higher interest rates or make a down payment of 10% of the appraised property-value along with a first mortgage of 80% of the appraised value and a second mortgage for the remaining 10%.

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I want to take a mortgage loan and I have heard from my friend about mortgage loan with pmi and about piggyback mortgage but I do not know much about these types of loans and also do not know which one will be better for me. Please suggest me which loan shall I take, mortgage loan with pmi or piggyback loan?
Posted on: 30th Dec, 2005 02:09 pm
Hi Jonny,

When you are paying a down payment less than 20% of the sale price or the appraised home value then you will have to take PMI. One other option if you are not interested to pay PMI premium is to take piggyback mortgage loan and can avoid PMI premiums if you get the necessary approval.

If you are able to pay more than 20% as down payment then no question arises for PMI but if you are not able to pay more than 20% then I would suggest you to take mortgage loan with PMI. Though you will not get tax deduction on pmi premium and in the other option, if you take piggyback mortgage loan then you have to pay higher interest rates on second loan. The piggyback mortgage is a combination of two mortgage loans like 80/10/10 or 80/15/5 etc.

So my suggestion is if you are not able to pay more than 20% then it will be better for you to take a mortgage loan with PMI.
Posted on: 30th Dec, 2005 03:17 pm
You have not mentioned your FICO score here. If your FICO score is good then you can take piggyback mortgage. Generally most of the lenders demand 680 for the second mortgage and 620 for the first mortgage. But if your credit score is not good enough then you will not qualify for piggyback loan.
Posted on: 02nd Jan, 2006 03:27 pm
On a 30 year fixed loan of $275,000 with 10% down payment, what is the PMI cost? Can you prepay the amount or roll it into the mortgage? Is there a $cost per $1000 borrowed?
Posted on: 14th Apr, 2006 12:53 pm
Hi Helen,

Your Annual PMI will be $1287 with the monthly payment being $107.

Murphy
Posted on: 14th Apr, 2006 01:05 pm
If the loan involves a lender paid mortgage insurance, then the cost of the PMI is rolled into the mortgage itself. But it is not advisable to go for it as the payments are amortized over the entire life of the loan.
Posted on: 14th Apr, 2006 01:22 pm
By $ cost per $1000 borrowed you are pointing towards APR on the loan amount or the Monthly Payment Per $1,000 Borrowed
Posted on: 14th Apr, 2006 01:32 pm
Helen,

The PMI can be prepaid or rolled into the mortgage although rolling into the mortgage is not advisable.
Posted on: 14th Apr, 2006 02:18 pm
Are you required to have PMI on a preconstruction property locked in at $200,000 with a 5% down, when the same developer just sold an identical property for $270,000. It seems to me that the LTV ration is less than 80% and the accrued equitey is already above 22%. Is there a way to eliminate the PMI at closing?
Posted on: 25th Apr, 2006 12:40 pm
Hi,

Your query is answered here. Kindly check and get back if you have more queries.

James
Posted on: 25th Apr, 2006 01:01 pm
I do not know whether my question has been already covered but I could not find it. Can we say PMI as another name for mortgage life incurance?
Posted on: 28th Jul, 2006 02:24 pm
Hi,

The two of them are different and serves under different conditions.

While a mortgage life insurance pays off the mortgage incase the borrower dies or becomes disabled, PMI is an amount paid by a private insurance company to a lender in case a borrower defaults on his mortgage payments.

PMI is meant to protect the lender and not the borrower.


God bless you.

For MortgageFit,
Samantha
Posted on: 28th Jul, 2006 02:32 pm
Hi there! My wife and I had a baby a few months ago, and with her being a full time mom, I am the only one bringing money to the household, therefore, we have no money saved. Is it possible to buy a house with 0% down payment and no money for closings costs, considering that I have an excellent credit score, or shoul I wait until we at least have some money saved?
Posted on: 20th Sep, 2006 11:28 am
Hi,

I can understand your situation. You can get 80-20 and no-cost mortgages provided by various lenders.

In 80-20 loans you will not have to pay any down payment or take out a PMI but you need to have good credit score which you do have.

Thanks
Posted on: 20th Sep, 2006 02:05 pm
Hi,

An 80-20 mortgage loan can be an option you can select if you can not pay for the down payment amount. But instead of selecting a no-cost loan you can wait for some more time, build some savings so that you are able to pay for the closing costs and then buy a home.
Posted on: 20th Sep, 2006 03:02 pm
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