Financing PMI?

Swarles

My husband and I have recently decided to build our first home and are putting down a 10% down payment on the total cost of the home. After meeting with about 4 different banks and credit unions, one offered us the opportunity to finance our PMI. We had never heard of this. Basically it's going to add approx. $5,000 to the amount of our loan but it brings our monthly payments down by about $70/month. Does anyone have any experience with this? Pros and cons? We've asked the loan officer at this particular bank and she said there is no reason not to, but we can't find any information on it.

 

Tiffany618

I wouldn't do it. 

I can think of a couple of major cons here.

First, you will have to pay interest on that $5k over the entire life of your loan.   

Secondly, you should only have to payoff 10% more of your principle before PMI is no longer required.   It would take nearly 6 years for your $70/month interest free PMI payment to equal that $5000...not counting interest you paid on it.   

car_ramrod

You have to remember though that PMI can be dropped once you reach an 80% LTV ratio which will drop your mortgage payment.  If you finance the PMI you will be paying interest on it for the life of the loan, so for 30 years. 

 So over the course of the loan you will end up paying about $8,600 if your interest rate is 4%.  If this amount is less than you will pay for the amount of time you have to pay PMI than it is the right decision.  So to break even you would have to pay PMI for close to 10 years.  Odds are you won't be paying PMI that long so it is actually a worse deal for you but better deal for the bank because they make more in the long run.  Just food for thought.

Swarles

Well the reason we are leaning toward doing it is this:

If the PMI drops off after we pay another 10% that wouldn't be for at least another 12 years (I think). What we have heard is that you pay off the interest first (which will take 12.4 years) then we begin paying off the value of the home. So that could take 12-15 years (is that correct? If I'm wrong, PLEASE let me know).

So, we can pay $70/month for 15 years on top of the principal and interest or we could pay $13/month for 30 years on top of the principal and interest.

I understand that it does not make ANY sense, that's why I'm confused and our loan officer isn't offering us much help.

car_ramrod

You don't pay interest off first.  Yes in the beginning it feels like all you pay is interest but in reality you are paying principle as well each month.  Every year you end up paying more and more principle becasue your interest decreases as your principle decreases.  Generally it should only take you about 5 years to pay off the first 10% of your mortgage so definitely better in the long run!  I encourage you to download an excel amortization schedule, it will allow you to easily see the numbers by month and year!

Swarles

Ok, that makes sense. That's how my car works so I don't know why I didn't realize that. I've set up an appointment with said loan officer because I don't fully understand this. Hopefully tomorrow, I have a better understaning. Thanks!

lil_jen051708

Also, house prices can rise.  Is this a conventional loan?  I would ask what the minimum amount of time you have to pay PMI (on our conventional it is 12 months, but on the FHA loan we looked at it was 5 years regardless of value).  So in 2 years, say prices skyrocket.  You can pay for an apprisal to get PMI dropped. 

We specifically looked for a loan that had the shortest required PMI payments (12 months).  We did a lot of renovations all in cash.  So in a few months, we can pay to reappraise our house and drop the PMI.  So say we bought the house for $100,000.  We did a 5% conventional loan, so the loan would be $95,000.  Lets say we did $30,000 of cash renovations so hopefully our house is now worth at least $130,000 (30 + purchase of  100).  So when the required PMI time comes up, say we appraise again at $130,000 and our loan amount is now down to $93,000.   93/130 = 71.5% so we could drop our PMI.  I think the appraisal will be a few hundred out of pocket but definitely worth it. 

I would not finance it. 

CurbsideProphet

I also would not finance it. Of course the lender would want you to finance it, then they earn interest on it over the life of the loan. Good for them, bad for you. If your initial mortgage payments are interest only I would look for a different loan. We just bought last year so a large chunk of the payment is interest, but not the entire thing.