How I avoided monthly PMI even when making 5% down payment
 

What is PMI?
PMI stands for Private Mortgage Insurance.
When you buy a house and make a down payment of less than 20%, the lender requires you to take PMI. This insurance policy protects the lender from losing money if you end up in foreclosure. Private Mortgage Insurance is also required if you refinance your current mortgage with less than 20% equity.
One way to avoid paying PMI is to make a down payment of at least 20% of the purchase price of the home. If your new home costs $300, 000, for example, you would need to put down at least $60,000 to avoid paying PMI.

How much does a person Pay monthly PMI over the period?
Jenny bought a house for $520,000 and put 5% down ($26,000) taking a 30 years fixed loan. She has a good FICO credit score (690). How much do you think she will pay in PMI over the life of the loan?
Jenny will be paying around $407.33 per month as PMI for 117 months. If I add the numbers, she will be paying $43,584 over the period.
Source: https://www.mgic.com/rates/ratefinder
Yes you read it correctly. The amount is in excess of 43k over the period. Since the amount is added to the mortgage, most of us don’t realize the same.
In summary, you may be paying around 9% of your loan amount over the period in form of monthly PMI.

Can I avoid paying monthly PMI even when I am not having 20% to put down?
This is the insider secret of Mortgage Industry which most of the people are not aware of.
Yes, it is true that you can avoid monthly PMI even when you making a down payment of less than 20%
The Mortgage Insurance Company lets you make a one-time payment to cover the monthly PMI.
There are 2 ways by which you can avoid monthly PMI even though you have down payment of less than 20%.

Option 1 -> LPMI (Lenders Paid Mortgage Insurance)
Yes. You read it correctly. Lender may be ready to pay for your PMI. But why will they do it since it is your responsibility? They will do it by charging you slightly higher interest rate than what you are eligible for. Lender-paid mortgage insurance (LPMI) LPMI usually results in lower monthly payments than borrower-paid mortgage insurance, but also carries a higher interest rate. It remains for the life of the loan, so it can't be canceled unless the loan is refinanced or paid off.
How did I do it: I bought my house in 2012 for around 400 k. I wanted to put only 5% down but was not willing to pay monthly PMI. I checked with my Mortgage Loan Officer and told her to customize my loan with LPMI. My base interest rate was 2.75% for 15 years loan. Since I went for LPMI, the loan interest was increased to 2.875, a one notch up resulting in slight increase in Mortgage payment but a significant savings on PMI.
Note: The increase in interest rate because of LPMI is dependent on many factors. It can go up from .125% to .5% depending on many factors. Check with your Mortgage Loan Office for the exact number.

Option 2-> BPMI (Borrowers Paid Mortgage Insurance)
This is another option of Borrower paying the PMI as a one-time premium. Most of time this will be around 3-4% of the total loan amount. This may not be the best option available but can be used to save around 6% over the period which could be significant.
Note: LPMI/ BPMI may not be the best option for everyone.

Conclusion: You should have an intelligent Mortgage Loan Officer who can help you to make an educated decision of the type of loan you should go for and the amount you will pay over the period of loan. Before you may realize, you would have spent 1000s of dollars of your hard earned money in PMI that may be avoided.

Disclaimer: Please check with your MLO for the best Option for your scenario.



Sudhir Agarwal is a registered Mortgage Loan Officer. You can contact him at 770-289-0370 or Agarwal.sudhir@gmail.com if you have any questions regarding your loan.