Don't Forget to Figure PMI Rates

Don't Forget to Figure PMI Rates

Most mortgage shoppers forget to shop for PMI rates. They have scrupulously shopped for the best interest rate and sometimes included what closing costs will add up to. But, are not even aware that different mortgage insurance companies can be chosen and there are different ways to handle the PMI that have a cost-saving effect, as well as qualifying for a higher mortgage amount.


Related Article: 4 key factors to consider when buying a house on the Florida Gulf Coast


What is PMI?

Private Mortgage Insurance (PMI) is an insurance to protect the bank in case of default of the borrower on a home loan. Studies have shown that homeowners with less than 20% invested in a home are more likely to default.  So if you are putting down between 3%, 5%, 10%, 15% up to just below 20%, PMI will be necessary to insure the lender in case of default. The more you put down the lower the price of the private mortgage insurance. After you have reached a 20% down payment, there is no mortgage insurance necessary on the loan.


Company Choices

Often the borrower has never had a conversation about what private mortgage insurance company will be used by the lender. The common thought is that there is no choice about what company is used. That is not a truth, but many lenders will just choose one when the borrower has not inquired about different companies. Some of the different PMI companies are:

There are other companies, ask your lender to suggest others to shop. With the help of your mortgage broker or lender, you can use the above calculators to give you a good estimate of the PMI charge.


Types of PMI

The shopping choices do not stop with just which company to choose. There are different ways to do the PMI, and different ways it will affect your payments and buying power.


1. Borrower Paid Monthly Private Mortgage Insurance

This is the most common way, and what is usually thought of with the payment of the PMI. However, it is the most expensive for the consumer. The insurance rate is figured by considering the loan to value rate and the borrower's credit score. The monthly price is added to the total mortgage payment and does not decline. Usually, it is required to be paid for 2 years at a minimum. But, also there must be a 20% equity value compared to the amount of the loan. When that occurs it is up to the borrower to contact their lender to start the process of stopping the insurance payments. The usual process is the lender will choose the appraiser, but the borrower will pay for the appraisal. This is to verify the 20% equity.


2. Lender Paid Mortgage Insurance

This is the PMI paid for by the lender. They will charge a slightly higher interest rate when doing this. The type of situation that a lender may do this is the following. * Not a first-time homebuyer  *A credit score of 720 or above  *A 5% downpayment


3. Split Premium Mortgage Insurance

This is a new product and is not offered by all companies. It works similarly to an FHA loan. Some of the premium is paid upfront but can be rolled into the loan. The remainder is paid monthly.


4. Single Premium Mortgage Insurance

This is the least expensive way to do your mortgage insurance. As the name says, it is paid in one payment. It does not raise interest rates. If a borrower has a middle credit score of 680 or better and a 10% down payment or a credit score over 720 with a down payment of as little as 5% down it is a good option.

Another choice sometimes available is refundable PMI premiums and Non-refundable premiums. This variable is available with some PMI plans. Check with your mortgage servicer to see if this is available for you. Sometimes with the refundable plan when the loan is paid off in full, you are due to a refund amount.

I Loan has two charts to show how the correct mortgage insurance can save on your monthly payment, and increase your buying power.

The variables when shopping for the best mortgage rate can be confusing. Do not forget to include the cost of the private mortgage insurance in your calculation of the cost of the mortgage. Contact us to get a professional to work with you in all the aspects of mortgage shopping.

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