By Mike Miles
Don’t jump out of your seat … I know reading about private mortgage insurance (PMI) is incredibly exciting. I have posted a few different times regarding PMI (applicable on conventional loans when a borrower doesn’t have at least 20 percent equity in the home); why it exists, how long it lasts and different ways to pay it. Today’s post will target one specific type of PMI and why it’s not available to everyone who is required to pay it.
Single-premium PMI is gaining in popularity. The reason is because the total cost of this PMI is about 50 to 60 percent less than the traditional PMI (paid monthly). It’s reduced because it’s paid/accounted for in a lump sum amount versus being spread out over years’ worth of mortgage payments. The lump sum can be paid in cash at time of closing or it can be added to the loan amount … borrowers’ decision.
This way is gaining momentum because it can minimize PMI costs to maximize borrowing power. However, not everyone can take part.
The Consumer Financial Protection Bureau (CFPB) finalized a rule called the Qualified Mortgage (QM) rule as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. One of the provisions of the QM rule was ensuring that a borrower couldn’t be charged more than 3 points (percent) in fees on QM loans. Overall, this is a great provision as it eliminates predatory lenders from overcharging borrowers for things like origination and/or discount fees.
Other cost such as daily interest, underwriting and single-premium PMI are fees categorically paid to the lender (in addition to any subjective charges including origination and/or discount fees) and therefore included in the 3 percent QM fee test.
What does this mean? Well, if all points/fees paid to the lender exceed the QM threshold, the loan isn’t an eligible loan and therefore can’t close. In most cases, a lenders fees shouldn’t exceed much over $1000 to $1500 (including underwriting, origination and daily interest). The average loan for our NE Johnson county area is about $250,000 making the average points/fees per loan to be about .6 percent. This means there is about 2.5 percent of available before the 3 percent QM threshold is violated.
In some cases, a borrower’s single-premium PMI cost can exceed 2.5 percent and when this happens, this attractive PMI option is no longer available. When this occurs, the borrower is basically forced to pay the PMI the traditional way where it’s built into the mortgage payment for several years.
Costs for PMI are based on criteria that includes equity position, credit scores, number of borrowers, type of conforming loans and debt-to-income ratios. Basically, the higher the borrower risk (on paper) the higher the cost of the PMI.
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268