Only 5% down and no PMI, too good too be true?

Question

Hi BP community,

Looking to purchase my first property and slightly short on making 20% downpayment. Working with Quicken Loans and they are offering a loan with a slightly higher interest rate (about 0.5%) but only 5% downpayment and no PMI. It seems like I understand how it works, it appears to me that they are just lumping the cost of PMI into my mortgage by raising an interest rate, but it still looks like a good deal. Am I missing something? Something I particular I should pay attention too? If anyone had experience with such mortgage, please share. Thanks for your help,

Mila

Mike H. · Answer

Does the PMI drop off at 80%? I thought they had changed that rule not too long ago.

• Loans at 90% LTV or more will pay the annual PMI for the complete term

But since they're being told that there is no PMI, I'm wondering if that means its an FHA loan. If so, then I think FHA has some other form of insurance called MIP. And MIP, I think, is also going to be there for the life of the loan.

All home loans insured by the Federal Housing Administration require insurance to protect the lender — it’s just not the “private” kind. So the policies applied to FHA loans are simply referred to as mortgage insurance premiums, or MIPs.

While it used to go away after it hit 78%, the new rules now have it stay on longer. And since he appears to be doing a 95% loan, it appears as if that insurance will be on the books for the entire life of the loan.

That still doesn't mean he can't wait til it hits around 80% and then refi into another loan to get rid of the insurance payment. But in 5 years the rates may be higher.....

At the very least, I think you need to find out what type of loan it is (conventional, fha, etc), what type of insurance is on there (no PMI doesn't necessarily mean no insurance), and how long that insurance will remain.

Just because you're getting dinged with insurance doesn't mean its a bad loan. Again, even if that insurance is locked into the payments for the life of the loan, all that really means is you're going to have to refi it at some point to get rid of it...... The insurance isn't tied to the house - just the loan

John Newman · Answer

Hi @Mila Makhanova,

You should ask Quicken if this is a conventional or FHA loan.  Conventional loans have Private Mortgage Insurance (PMI) until the LTV is <78%, while FHA loans have Mortgage Insurance Premiums (MIP) for the life of the loan, regardless of LTV.

When I purchased my primary residence, I got a similar loan; mine was a conventional loan with 5% down payment, and I chose the Lender Paid Mortgage Insurance (LPMI) option.  My mortgage broker provided 3 options: traditional monthly mortgage insurance until my LTV was <80%, upfront mortgage insurance (cash due at closing), or the LPMI mentioned above, in exchange for a .25% increase in the rate (.5% sounds like too much).  The upfront MI option was significantly less than the monthly MI in total.  Between the LPMI and monthly MI, the break even period was over 8 years, so not great.  I then compared the upfront to lender paid options only.  My thinking was if I had the cash to pay all my MI upfront, and I invested it instead of paying the MI, I would come out ahead even with the higher rate and tax considerations.

Also, mortgage insurance is currently tax deductible, only because Congress keeps extending the sunset each year.  The tax deduction for mortgage interest on the other hand is likely to stick around much longer.

If you choose the monthly PMI, you will probably need to get an appraisal done (an extra $500-$2500ish) to prove the value of the home if you want to count appreciation for eliminating the PMI.  Lenders do not automatically remove the PMI requirement, so the responsibility falls on you to make it happen.  That is unless of course you want to just wait it out (not likely) until your regular payments bring your LTV <78%.

In my opinion, LPMI makes great sense (cents too) for investors who can do something better with the money, while upfront PMI makes sense for savers.

Steve Vaughan · Answer

.5% increase from what rate?  On a 4% loan, .5% represents 12.5%.  PMI is normally about $75/mo per $100k, right?  That's a lower percentage cost, about 9%.

I would do a simple cost/benefit analysis and consider your holding time.  If you really think you will hold this mortgage (muerte - till death) for the life of yourself or the term, pay the PMI, which will drop off as @Upen Patelpoints out.  If you will have a liquidity event in 5 years or less (a sale or refi) it may make sense to pay the higher rate.  What are your long-term plans with the property @Mila Makhanova?

Brent Coombs · Answer

@Mila Makhanova, it still boils down to: how good a purchase deal have you found, and how good are your plans for it? It's a numbers game. If that's the best loan deal you can get, try to ensure your purchase deal is even better! Cheers...

Brianna H. · Answer

My primary residence was set up using this type of loan. They actually advertised it as a 'NO PMI' loan, but the interest rate was way higher in my case. Since my house was a foreclosure and they thought it required some work, this was the only loan that the bank was willing to accept so I took it with intentions of refinancing as soon as I could. I was able to refinance from a 5% DP, 5.125% 30 year loan to a 2.9% 15 year loan with >20% equity in the house in just 6 months.

If this house is currently under contract and you can't come up with the 20% DP right now, I would suggest the route I took. Otherwise, waiting until you have the 20% is generally your better option. Take a look at the cost to refinance, etc. That 0.5% may not seem like a lot, but it sure does add up! It took me 2 years to recoup the costs of the refinance, but I have saved an additional $3500 already!

Russ Draper · Answer

I paid a higher interest rate to get out of PMI, in my case the numbers made more sense to me to pay the higher rate instead of PMI, even for a shorter term.  Now I get offers to refinance all the time, but the amount owed is so small it isn't worth it to refinance!

Jared Rine · Answer

@Mila Makhanova

I think it depends on how much you're saving by not paying MI.  Yes, you're paying it in the form your payment, but that might offset you not paying that 10-15% difference that you would be bringing into the deal.  If you are dealing with a broker, you might want to check United Wholesale Mortgage (they don't have retail originators like Quicken) as they have a similar program and literally the best rates out there and they can do the same thing by lumping the MI into the payment.

Just my .02

Only 5% down and no PMI, too good too be true?

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