By Mike Miles
I call PMI a necessary evil. Without it, banks wouldn’t lend to borrowers that don’t have at least 20 percent equity in a home. Most people that are aware of PMI aren’t aware of the payment options available. Most borrowers that have PMI pay it the traditional way, which is technically known as borrower-paid-mortgage-insurance (BPMI). That’s where there is a temporary add-on to the mortgage payment until 20 percent equity is achieved before it goes away. That typically takes around seven to ten years on average depending on the equity position at the time of closing.
Single-premium mortgage is offered at a discount. This is because the entire cost of the PMI is paid in a lump sum at the time of closing. Basically, it’s pre-paid and by doing so, the companies that offer/issue the PMI provide this option at an overall lesser cost. I’ll provide an example to illustrate this but keep in mind that every borrower could have a different PMI cost structure as it’s based strictly off credit scores and equity positions.
Home value/price: $300,000
Loan amount: $285,000
PMI cost factor (traditional): .41%
PMI cost factor (single premium): 1.16%
The above data represents a potential buyer’s PMI cost comparison at a 5 percent down payment amount. The traditional PMI will be attached to this loan for about nine years. The cost of the traditional PMI is about $97 per month ($285,000 x .41% / 12). The total paid using the traditional method would be about $10,500 (monthly expense x 9 years of payments). The cost of the single-premium is $3,306. That’s about a $7,000 cost difference!
So, the next question is … how is it paid? There’s two options. It can be paid at the time of closing or it could be financed. If it’s paid at closing it’s pretty straight forward as it’s a one-time cost added to the existing cost structure of the loan. If it’s financed, it’s added to your loan amount. This way saves you from paying it at closing, but it doesn’t increase your payment. However, the increase in payment is significantly less than the traditional PMI payment. Financing that extra $3,306 (in this example) increases the payment by about $15 per month, but that’s $77 less than the traditional method.
Remember, knowledge is power and one take-away from this post is to know how to maximize your buying power. Either you learn how you can pay less per month in PMI expenses or you know that by minimizing your PMI expense, you may be able to afford more, which can help you during a competitive seller’s market.
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