I want to start a little info thread on PMI, to help people make better loan decisions. This is inspired by a recent thread where the borrower was unaware of the PMI amount until closing.

I'll start with the basics.

What is PMI? PMI is an acronym for Private Mortgage Insurance. Lenders require PMI for mortgages where the borrower puts down less than 20%. Simplified, this insures the lender will recoup their full investment if the borrower defaults. PMI provides NO benifit to the borrower. The lender makes the borrower pay for it, as a condition of giving them the loan.

How To Calculate PMI
PMI is calculated as a stairstep function. That is to say, the percentage you pay increments in steps, for every 5% of the selling price that is put down. i.e. You pay the same PMI rate for 10% down, as you do for 14.999% down. Here is the breakdown:

Base-To-Loan % 30 yr 15 yr
95.01% to 97% .90 .79
90.01% to 95% .78 .26
85.01% to 90% .52 .23
85% to 80.01% .32 .19

Here is an example using the amounts from the above mentioned thread.
$290,000 house with $14,500 down(5%) 30 yr loan
principal: $290k - $14.5k down = $275.5k (selling price - down payment)
Base to loan %: $275.5k/$290k = 85% (principal / selling price)
PMI Rate: Use above table, for 30yr loan at 85% base to loan %, the PMI rate is .78%
PMI Premium: $275.5k * .0078 = $2148.90 per year, or $2148.90/12 = $179.08 per month.

This Is How They Get You
Lenders will calculate the PMI premium when you get the loan, and it will stay the same until you get to 75% LTV (I think). So, even though your principal amount will be less several years down the road, you will still be paying PMI based off of the original principal amount.

Although you can cancel PMI once you achieve 80% LTV, the lender isn't going to do this automatically. This is pure gravy for them, and they will keep charging it as long as they can. Recently (1998 I think), new laws were put into place so that lenders must stop charging you PMI once your get to 75% LTV (5% past 80%!).

Lenders are always coming up with new ways to screw you. Now they have the PMI-less loan. So you can get a loan with 5% down, and you don't have to pay PMI. Sounds great, but they are going to charge you a higher interest rate (to the tune of 2% for one loan I saw). The alleged benifit is that the entire amount is tax detuctable, where as PMI is NOT tax detuctable. Well who cares if it is tax deductable, you are paying a buttload of extra interest for that tax deduction. Probably more than the PMI would have been. The best part about it is that your interest rate is the same for the life of the loan. So even if you pay the mortgage down to 50% LTV, you still get to pay the higher interest rate!

PMI tips and tricks
Here are a few well known tactic to keeping the PMI damages to a minimum.

Interestingly enough, second mortgages don't count towards LTV ration for calculating PMI. So you can get what is refered to as a 80/10/10 (or some variation) loan. Essentially you get a first mortgage for 80% (with no PMI), and a second mortgage for 10% (or whatever is left after your down payment).

Get your home appraised. If you are already paying PMI, your house may have appreciated above the 80% threshold. Likewise, if you have done some major home improvments. Some lenders will make you wait a year or two before they let you do this. It is best to call and ask.

And the number one way to avoid PMI...Put down 20%! If you can't afford 20% down, perhaps you are getting more home than you can afford*.


A Few Closing Remarks
Using this info, combined with other data, there is no excuse to not know almost exactly what to expect at closing. You should know exactly what your payment will be. You will know the interest rate you locked in, the loan amount, the LTV. Ask for the tax and insurance info before hand. There are numerous number games that lenders can play, to screw you over big time. The way they see it, who is going to back out of a deal at the last second because a payment is a little higher than expected.

Set up a spread sheet with all the numbers. You can play with the numbers to see how much it affects your payment to get a second mortgage, in liu of PMI, or how different interest rates affect you payment, how much more is a 15 year mortgage than a 30 year(do it, you will be supprised!).

Please add comments, questions and/or corrections. Also, it would be cool if an Excel expert could convert the above PMI table into an Excel formula, and post it.


*Of course in some markets 20% down is unreasonable, since home prices are unreasonable. So just prepare yourself for the PMI butt pirates.

When I talk to my broker today and ask about refinancing my 7/1 arm to a 1st and a 2nd, how exactly do I word it. In other words, what exactly do I ask for? Some of you may have followed my situation in another post (here)and know I am looking for lower payments and/or getting rid of PMI.

One question about a 1st and 2nd mortgage though,won't I have that second loan for about 10 years? Do I eventually refi that 2nd mortgage? If so, when and how? If I stick with the current PMI and get a better apprasial now, lower interest rate, and keep paying current amount I should have PMI gone in 1-2 years with the going home appreciation rate in my area. Am I thinking clearly here?

Thanks for all your help!
Jim

montag,
Tell them you want your first to be 80% LTV. Explicitly tell them you do not want to pay PMI. If I understand you next question correctly, yes, the second mortgage will be for a shorter term (probably 15yrs). Therefor the amount of P+I you pay for your first and second mortgage will probably be more than you are paying now for P+I. BUT, you will be saving $180/mo on PMI. You will now have the amount of the second mortgage paid off in 15yrs, instead or 30. So instead of throwing the PMI down the toilet every month, you're paying the money towards your equity in the home.

mephisto,
As far as I am aware, yes it is fixed, for all lenders. Now it may change if you do a buydown loan, and for some ARM's. Perhaps unscrupulous lenders are allowed to add a little extra for themselves, but I doubt it.

I would start looking for another broker. Look at bankrate.com.

Here are some numbers.
Your current payment:
7/1 ARM @ 6.375% on $290k = $1718 P+I + $179 PMI = $1897/mo

After a refi:
80% first 30 yr fixed @ 6.375 on $232k = $1447/mo
15% second 15 yr fixed @ 6.75 on $43.5k = $385/mo
Total = $1832/mo

So you are saving $65 a month, plus you will have paid off the $43.3k second in 15 years. You will have to pay a few grand for closing costs though.

monkeyboy said:

<< I would start looking for another broker. Look at bankrate.com.

Here are some numbers.
Your current payment:
7/1 ARM @ 6.375% on $290k = $1718 P+I + $179 PMI = $1897/mo

After a refi:
80% first 30 yr fixed @ 6.375 on $232k = $1447/mo
15% second 15 yr fixed @ 6.75 on $43.5k = $385/mo
Total = $1832/mo

So you are saving $65 a month, plus you will have paid off the $43.3k second in 15 years. You will have to pay a few grand for closing costs though. >>

But, using that scenario, if I get rid of my PMI in say 2 years then my total payment would only be $1718 but if I did the first and second option I would be stuck with the $1832 payment for the life of the loans. I really don't see how this is an advantage. If I was expecting to have PMI for, lets say, ten years then I could see how the two step loan would be the best. Thanks for your help as I am really trying to look at this from every angle.

monkeyboy, thanks so much for this thread. I think I am starting to see things much clearer now.

I'm looking to become a first time home buyer in the coming months. I understand the concept and the advantages of using a 80/10/10 or 80/15/5 structure. But realistically, as a first time home buyer without much of a credit history what are my chances of being able to get a 2nd mortgage at a decent rate? Also, will the initial payments on the 2nd mortgage loan go to pay interest only like montag stated above...or was that just the deal his particular broker was offering?

What loan products are available for second mortgages? How much higher are the rates? Fixed or adjustable? Can I get a prmary loan from one company, and secondary from another company? Who is the best company for seconday mortgages?

SIS says that I can refi the second into a lower rate loan. Doesn't a refi require equity in the property? Aren't there costs associated with refi's?

Thanks,

I purchased a new home at a bargain price about three months ago. I wasn't able to put 20% down, so I am paying PMI, but the house was appraised for 60k more than I paid for it when I did the load. My LTV ratio was done by the purchase price, not the appraised price. If I could use the appraised price instead then I'd be able to eliminate the PMI.

Is there any time limit on when you can go back to the lender to do this? Does anyone have a link to the specific law?

monkeyboy, two big thumbs up for a very useful thread. This is a model of FW at its best, IMHO. Thanks for putting in the time to do it right.

Minor point: I read somewhere that by law, conventional mortgage lenders now have to remove PMI once you get either 21 or 22% equity AND request it--wish I could recall the source. Anyone have that?


OmegaDeal (especially) and JBannanas, BE SURE to check out webstarmortgage.com and the related threads in this forum.

OmegaDeal, you can refinance with these guys using ANY CURRENT APPRAISAL that meets standard lender's criteria. Plus, their rates are exceptional. I bet you could dump all your PMI, drop your rate significantly, AND possibly even get a little cash back if you need it.

JBannanas, they do 80/15/5 mortages, and you only need a 620 FICO score (basically means no serious credit problems) to get it.