This week I signed my first contrast for a duplex and went to two different lenders in my area for pre-approvals. My question is which loan is better in the long run. I am purchasing the property at 125k with 10% down.
First lender offer: 3.25% Interest with PMI $38/month
Second lender offer: 3.75% Interest with no PMI
Does it make sense to take the lower interest rate with a PMI and make extra payments over the next 2 years so I can remove the PMI early so I have a lower payment.
Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
10y
I would do just the opposite. The higher rate lasts for as long as you have that loan in place. The PMI lasts only as long as you are above 79.9% LTV. You could get rid of the PMI in 12-24 months with a little extra cash thrown at the payment, and then enjoy the lower rate AND no PMI for the remainder of the note.
Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
10y
@Craig DesnoyersI am assuming you are looking at 15yr mortgages at those rates, so your payments (P&I only) would be $828.50 (790.5+38) for the first option and $818.5 for the second option. I would take option two, no PMI.
Be careful about assuming that its easy to remove PMI. It typically takes a new appraisal in addition to paying down the loan. This might be fine in your area, but if housing prices are stagnate or falling, it is tougher than just paying down the loan.
Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
10y
I would do just the opposite. The higher rate lasts for as long as you have that loan in place. The PMI lasts only as long as you are above 79.9% LTV. You could get rid of the PMI in 12-24 months with a little extra cash thrown at the payment, and then enjoy the lower rate AND no PMI for the remainder of the note.
Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
10y
@Charlie Fitzgerald is like right. I am guessing it would take you about 3-4yrs to pay down the note to below 80% LTV, assuming a 15yr note. That means your paying about $1370-1825 for the PMI, assuming that your loan allows it to be dropped at 80%LTV and the PMI is not a fixed duration. The extra interest you would be paying is $4972 over the life of the loan (again, assuming min. payments on a 15yr note).
I am leaning towards the PMI option at this moment with hopes of down the loan enough to remove the PMI and enjoying the lower rate. Thank you for your response.
Yes, I plan to house hack while saving up again for another rental property. Getting a slow start in real estate, joined BP a few months ago and finally found a place at a great price with awesome rental income. So it sounds like the lower interest rate is the way to go with saving $8609 over 6.5yrs with the option to pay extra and in the end pay less PMI?
Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
10y
Yes. Additionally, after 24 months of payments, you can also utilize market appreciation rates as a basis for the removal of the PMI. SO the effective date of reaching the 78% LTV (where you need to get to using market appreciation and principal reduction) will likely be a lot sooner than 6.5 years using principle reduction only. In any case...the lower rate with PMI is a better route to go.