Private mortgage insurance, or “PMI,” gets a bad reputation. However it’s often undeserved! PMI is much more cost effective now than in years past due to rate competition between PMI providers. While some banks and direct lenders are captive to only one PMI company, as independent mortgage brokers, we work with multiple PMI companies. They do not compensate us for bringing them business; what we get out of it is being able to offer you a lower total monthly payment or lower cash to close. PMI empowers you to purchase a home with as little as 3% down!
The key to buying a home with less than 20% down, without overpaying for PMI, is understanding it.
At a very high level, PMI is an insurance policy, not unlike your car insurance policy. If you are a driver, you are required to pay for car insurance in part to protect others from what you might do wrong. Similarly, if you put less than 20% down, you will have PMI to protect the lender against default. Also like car insurance, it is risk based.
Someone putting 5% down with bruised credit might very well pay 10 times more per month than someone putting 15% down with good credit. You can see one example PMI rate sheet here.
What if I am that person with only 5% down and bruised credit?
Often the optimal solution here is an FHA loan. FHA loans come with government mortgage insurance that is not judgemental about FICO scores, in addition to requiring very low down payments. These are very commonly used by younger families just starting out, by people that had a rough patch in the past that impacted their credit, and others that have recovered from something big.
I have 20% down, but I’ll need to gut and redo the kitchen. Can I roll this rehab item into the mortgage?
If 20% down given the property condition is a stretch, often times PMI is the solution. The FNMA pricing adjustments are such that 15% down with PMI actually has better interest rate pricing than 20% down. This is because the insurance policy makes it lower risk for Fannie Mae than vanilla 20% down with no insurance policy. Effectively, this allows you to finance minor renovation items such as a single kitchen, or a single bathroom, into the mortgage used to purchase the home. If you didn’t follow all of that, let’s chat.
Won’t PMI increase my monthly payment?
Monthly paid PMI increases your monthly payment, yes. For those “cash rich, income poor,” another solution is a one-time upfront PMI payment. This one-time payment insures the loan for the entire life of the loan, and has no regular recurring monthly payment. Often times, 5% down with one-time upfront PMI has a lower down payment and lower cash to close than 10% down.
Do you offer “No PMI” loans that require less than 20% down?
Yes, we do! In order to keep the risk/reward profile reasonable, typically we have to compensate somewhere else. One option, for example, might be to keep the interest rate fixed only for 10 years, instead of all 30. What the trade-off is, is negotiable. Fixing the interest rate for only the first 10 years, for example, is a model match for a family buying a “starter home” that they intend to sell within 5 or 7 years.
What determines when I can cancel my monthly PMI?
This is covered by the federal Homeowner’s Protection Act. Read about that law here, and take a look at an authoritative in-depth chart on PMI removal here – it’s more complicated than a one-line answer.
PMI is common in the East Bay, and all over California
PMI doesn’t scare sellers in cities like Oakland, San Leandro, Berkeley, Stockton, Fremont, Vallejo, Hayward, and Concord, as it’s very common for buyers to put less than 20% down in these markets.
In conclusion, PMI is not “bad.” It’s a tool, and like any other tool it can be used or misused. The most important thing is to understand it so you know how to use it. We’re PMI mortgage experts in the East Bay Area of California, and would be happy to go over all your options with you.