PMI Question

jessica490 · February 2014

This may be a really stupid question but I'm confused on PMI. I know it gets added to the loan if you don't put 20% down (which most loans require). But say there is a conventional loan that only requires a small down payment such as 3 or 5% down, does PMI still get added if we can cover that 5% down? Or is 20% ALWAYS the number? TIA!

Xstatic3333 · February 2014

Disclaimer-I'm not a homeowner yet but I am in the heavy mortgage research phase...

It seems that there are actually plenty of conventional loans that will approve you with around 10% down if you are otherwise a good candidate, and in these cases the PMI will be applied until you reach 20% equity. I have read that the PMI that attaches to conventional loans is also more affordable on a monthly basis than the PMI that attaches to FHA loans. There used to be a conventional 3% down loan, but it has been discontinued by its servicer (Fanny Mae I think?) Fanny Mae now offers a 5% down conventional loan (and I think a good chunk is allowed to be a gift), but I have read that it is rarely offered in practice. Both of those have much higher credit and DTI requirements than FHA.

Basically, 20% is always the number. It attaches, then drops off at 20% equity except, as you probably know, with FHA loans.

hoffse · February 2014

PMI has to do with risk. It's almost always 20% because that convinces the bank that you have enough skin in the game that you're not likely to cut and run.

That said, like Xstatic mentioned, you can find the odd 5% and 10% down mortgages that don't require PMI. H and I have looked into one through BBVA compass that allows 5% down with no PMI - but you have to be a lawyer, doctor, dentist, accountant, or other professional to qualify. I suppose BBVA assumes that these people aren't as risky as other borrowers.

So yeah you can find them, but there are often other restrictions to curb risk to the bank. If you are planning to put down less than 20%, I would plan on having to pay PMI.

jessica490 · February 2014

Ok, thanks for the info!

maple2 · February 2014

One other thing to pay attention to is what you need to do to get the PMI payments removed in the future. As pp mentioned, some loans allow you to stop paying PMI once you can verify that you have reached 20% equity (usually based on an appraisal), others require that PMI payments continue for a minimum period of time regardless of how much equity you have. If you are going to have to pay PMI, try to make sure you secure a loan that lets you get out of it as quickly and easily as possible.

formerlyGDaisy09 · February 2014

20% is always the mark. We ended up with PMI when we bought our house, we decided the interest rate was low enough that is was worth not having the full 20% downpayment and paying the PMI for a couple years.

our bank offers 2 ways to get rid of PMI:

1. when you reach 20% of the original loan value

2. when you reach 20% of the appraised value of the house.

Home prices have risen in our neighborhood, and we are planning summer up-dates on the house (new roof- upgrading from asphault shingles to standing seam, and finishing a 3rd bedroom in the basement) so option 2 should get rid of our PMI with-in the year. So we paid an extra $2-3K in PMI to lock-in at an interest rate that is 1% less than it is today...and likely significantly lower than if we had waited until we had 20% ready to put down.

cbee817 · February 2014

maple2 said:

One other thing to pay attention to is what you need to do to get the PMI payments removed in the future. As pp mentioned, some loans allow you to stop paying PMI once you can verify that you have reached 20% equity (usually based on an appraisal), others require that PMI payments continue for a minimum period of time regardless of how much equity you have. If you are going to have to pay PMI, try to make sure you secure a loan that lets you get out of it as quickly and easily as possible.

Ours was based on appraisal- which was $15,000 more than we paid so our PMI (about $35/month) didn't last too long. The bank that we have our mortgage with sent us a letter letting us know when it would be removed- I checked the statement that month and it was all set.

jessica490 · February 2014

Awesome, thanks for the additional info!

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