Lender-paid PMI: Should you consider this option?

Lender-paid PMI: Should you consider this option?

Lender-paid PMI. Recently, conventional lenders have adopted a “No monthly PMI” loan program, sometimes referred to as a “Lender-paid” PMI loan. Mark Wells of Preferred Financial Services discusses the pros and cons of this program.

How can a lender make a loan where there is less than 20 percent down and not include a monthly PMI premium in the payment?  As with most things, this type of loan is not entirely a “free lunch.” The loan is booked at a higher rate, and the rate premium is used to purchase a single-payment PMI premium, so there is no need for the borrower to pay a monthly premium.

Why would I be willing to take a higher rate on my loan?  In the short term, this structure can save you a significant amount. For instance, for a $150,000 purchase with 5 percent down, the monthly PMI premium is around $120 per month. The higher interest rate of the “No-monthly-PMI” program only increases the payment by $31 per month. So even though you are paying a higher rate, your net savings are around $89 per month, or $1,068 per year.

Is there ever a reason to NOT use the Lender-paid PMI program?  Several instances may steer you back to a traditional monthly PMI loan: if you are buying a house that is priced well under market value, you will be able to drop the monthly PMI from your loan payment when your loan balance reaches 80 percent of the house’s value. If you think this might occur in the first few years of the loan, and if you plan to stay in the house for the indefinite future, it may be better to pay a few years of PMI premiums, since ultimately you will have a lower rate on the loan. Also, if you think you will pay the loan off faster, the same principle may apply, making the regular PMI premium better over the long haul.

It sounds confusing. How do I decide which one is best for me?  Your mortgage broker can calculate an estimate of your long-term lending costs for each type of loan if you provide the following information to the best of your knowledge: how long you plan to live in the house, the present value of the house, and whether or not you intend to make extra payments to pay the loan off faster. With this information, it is easy to compute your savings using either program.

Wells welcomes questions and comments, and is more than happy to help you run your PMI scenarios. He can be reached by phone at 864-235-9596 or by email at Mark@TheGreatestRates.com