Private mortgage insurance is what lenders may require when a borrower has less than 20% equity in a property. Private mortgage insurance (pmi) protects the lender against default, it does not protect the property owner.
Private mortgage insurance (pmi) is often something that borrowers do their best to avoid because of the additional cost. However if the 20% down payment (or 15% down payment with a "piggy back" second mortgage) is not possible, a home buyers or home owner who is refinance may opt for pmi or an FHA insured mortgage. Over the past couple years, FHA insured mortgages have become more costly to the point where if a borrower can qualify with pmi, it is probably a more cost effective option. Private mortgage insurance is not only for home purchases, refinances may benefit from pmi considering how low mortgage rates are at the moment.
Many are aware of private mortgage insurance premiums being paid as part of their monthly mortgage payment, however I find that Seattle area home buyers often do not know about the "split premium" option which dramatically reduces the amount paid in a monthly premium.
Let's compare scenarios based on a sales price of $444,500 with 10% down payment with excellent credit scores of 740 or higher and debt-to-income ratios under 45%.
- The traditional pmi with the borrower paying monthly in their mortgage payment would be approximately $160 per month (0.48% of the loan amount/12).
- A borrower could also opt to pay for the mortgage insurance premium in one lump sum (single premium) and not have it included in their mortgage payment. Based on this scenario, the cost would be $4,680 (1.17% of the loan amount). A seller can pay for this closing cost or a lender can use rebate pricing to help pay this cost.
- Another option is the split premium borrower paid mortgage insurance. Similar to an FHA loan, there is an upfront mortgage insurance premium and a reduced monthly mortgage insurance premium. The amount of the upfront premium can vary and the lower it is, the higher the monthly premium will be (and vice versa). For this scenario, if we assume an upfront premium of 1% or $4000, the monthly premium would only be $43.33 (0.13% of the loan amount/12). Just as with the single premium option, the upfront premium may be paid for by the seller as a closing cost or with rebate pricing.
Private mortgage insurance has risk based pricing that factoring various charactors of the borrowers such as:
- credit score
- loan to value
- program type and term of mortgage
- occupancy
- self employed
- previous bankruptcy
- location of property
If you have less than 20% down payment saved up to buy your next home or are considering refinancing anywhere in Washington, I'm happy to help. I've been originating mortgages at Mortgage Master Service Corporation for the past 12 years and have been licensed since 2007. If you would you like a FREE rate quote for a home located in Seattle, Redmond, Bellingham or beyond, click here.
