If you purchase a home with a conventional mortgage and you don't want to pay more than 5% down, you will be required to add mortgage insurance premium payments to your monthly PITI payments. It is then PITI plus MI. PITI stands for principle, interest, taxes (real estate taxes) and insurance. But the insurance in the PITI code is hazard or home owner's insurance. That insurance protects you and the lender from damages to the dwelling.
What is PMI and what is it For?
PMI was devised as a method of protecting lenders who loaned more than 80% of the purchase price, or 80% LTV (Loan To Value). The mortgage insurance company would then guarantee paying the loss difference to the lender if foreclosure occurs. For example, a home is purchased for $200,000. The buyer wants to pay no more than $10,000 down, or 5%. The break point of 80% is $160,000. With a 5% downpayment of $10,000, the difference is $30,000. That is what is insured.
If the lender were to foreclose on this deal, they would put the house back on the market and list it with a realtor. The lender would then be concerned about getting $160,000 back of the $190,000 loaned from that resale because the mortgage insurance company would cover the $30,000 difference.
How Much Will PMI Add to Monthly Payments?
PMI rates vary somewhat from lender to lender. The rates also increase in 5% increments starting at 80.01% LTV and up to 95% LTV. In the above example, the mortgage insurance cost per month would be just under $100. And that is added to the PITI. A 2007 law has made PMI tax deductable, along with your mortgage interest payments. Home loans taken prior to 2007 will not allow a homeowner to consider PMI tax deductible.
One way around PMI used to be the piggy back loan arrangement. That's where you get a first mortgage up to 80% LTV, and add a second mortgage to that. This way, buyers avoided PMI with very little down payment. You may hear this from relatives and friends who bought some time ago. But in today's market, it is virtually impossible to piggy back.
Viable Options for Low or No Down Payments with No PMI
If Alt-A mortgage programs make a come back from the sub-prime collapse, that could be a very good option. They can go to 100% LTV, or nothing down. Their rates are higher, but there is no PMI, and no down payment!
Government guaranteed loans are still around regardless of the sub-prime market. VA, FHA, and USDA, each has it's own set of guidelines. But they all offer 97% to 100% purchase programs at very competitive rates. Even FHA, which goes to 97% LTV and not 100%, has a way to cover the 3% difference from sources other than the buyer.
VA and USDA have their mortgage insurance prepaid by the lender while allowing that prepayment, 2%, to be included in the loan. You won't get stuck with PMI monthly payments. But FHA has a system where you do make monthly PMI payments. However, those payments are half of what you would pay for PMI on a conventional mortgage at 95% LTV.
If you don't want to be confused and possibly make a wrong decision, you should consult a mortgage broker who is capable of originating these programs. Just make sure the broker of choice has your best interests in mind and is willing to inform or educate you during the process.
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