No PMI With Less Than 20% Down?
Yes! It’s possible! Kind of…
There have been a lot of headlines about mortgage products with no PMI and less than 20% down recently. It’s been mortgage dogma for a long time that any loan less than 20% down includes PMI, or monthly mortgage insurance, but recently, many advertisements have focused on lower down payment products without the additional PMI payment.
The truth is, almost every product on the planet that allows less than a 20% down payment includes PMI, but the PMI is not always paid in a monthly payment. Often, it’s absorbed into the interest rate, and other times, through an up front fee.
How does that work?
It’s important to know how rates and mortgage lender pricing are offered – when a lender has a low, “too good to be true” rate advertised, it often includes discount points, or fees a borrower can pay for a lower rate. If, over the course of time, the lower rate offers more savings than the additional cost to get the lower rate, these points can make sense to pay. It also works the other way. That is, a lender can offer a customer a higher rate, and with the higher rate, “premium pricing” is available to offer the borrower credits toward closing costs. Instead of using them for closing costs, though, a lender could instead use this premium pricing to pay for a mortgage insurance policy through what’s called “lender paid mortgage insurance”, or LPMI. There is also “single premium mortgage insurance”, where a lump sum is paid in lieu of monthly payments.
So, a lender can look at a single premium option, for example, include the cost of single premium (the cost is a % of a borrower’s loan amount, the same as points!), and advertise a loan with no monthly mortgage insurance. The reality though, is that the PMI is being paid, just as a lump sum financed through a higher interest rate.
This is the same when it comes to VA loans for eligible veterans. VA offers 100% financing for purchases and up to 90% financing for cash out refinances, and most people note VA loans not having monthly PMI as a loan benefit. In reality though, VA charges a steep ‘funding fee’ for many of their loan products. So while you may not have a monthly expense in PMI, you will pay up front to cover the lender/investor/VA or the risk of offering low down payment products. Again, this isn’t a big deal when the savings offset the cost, but it’s important to know what you’re paying and why – there truly is no ‘free lunch’.
This explains why many of the “no monthly PMI” options come with higher interest rates, or sometimes higher fees. That’s not necessarily a bad thing, but it’s important to know your options. If you’re getting a loan you think you’ll have for a long period of time, monthly PMI may end up being a better choice. This is because most monthly PMI (depending on your loan program – FHA does things a little differently) will disappear once you pay your loan down to a certain amount or your home appreciates a certain amount. With PMI built into rate, though, you’ll continue to pay that higher rate unless you refinance in the future, regardless of home much your home appreciates or your loan balance shrinks.
The Bottom Line on PMI
With less than a 20% down payment, borrowers will see PMI – sometimes it’s super cheap (like on conventional loans for borrowers with great credit and 15% down!), and sometimes it’s super expensive (like on FHA high balance loans, where borrowers pay monthly PMI AND an up front insurance premium to HUD!), but the best way to structure a loan with PMI will vary by borrower. That’s why it’s so important to work with a great, knowledgeable loan officer like those we have at MasonMac. Our team has various mortgage insurance options to choose from and can walk you through the options to ensure you get a product that’s right for you and saves you the most in the long run. If you have less than 20% down, you have many affordable loan options with great terms, and your MasonMac loan officer can work with you to ensure you get a great product with the lowest overall cost to ensure your long term financial security!
Next time you see loan terms that seem too good to be true, reach out to your MasonMac LO – we offer no cost consultations and can provide transparency to the process, ensuring you’re educated, prepared, and that you’ll move forward with the best loan product for you!