By Mark Sherman
I am sure many of you recall that when you purchased your first home, you may not have had a full 20% of the Sales price to avoid a monthly Private Mortgage Insurance (PMI) premium. The majority of American homebuyers will get a Conventional Mortgage loan (see below for VA and FHA) of one type or another and pay a monthly PMI premium. This is calculated based on multipliers derived from the Loan-to-Value of the transaction and your credit score.
Assuming a buyer has good credit (for example a 720 or higher); you could expect the following approximated PMI payments:
On a Sales Price of $250,000:
5% Down Loan amount of $237,500.00: PMI would be $116.77 a month
10% Down Loan amount of $225,000.00: PMI would be $76.88 a month
15% Down Loan amount of $212,500.00: PMI would be $35.42 a month
To cancel this monthly premium, there are a few different things that must occur:
1.) You can pay the balance down to 80% of your original appraisal value, or
2.) After living in your new home for 12 months, you can pay for a new appraisal and hope that your home has appreciated enough to give you 20% equity in your home, or
3.) Your mortgage company will automatically drop the PMI when you pay you loan balance down to 78% of the original sales price.
These options are not always probable in the few years following your purchase and can be expensive propositions.
An obvious question that initially comes to mind is if the PMI is tax deductible?
The interest you pay on your primary home mortgage loan is. The answer is that it is only partially tax deductible if your income is below $109,000 (single or combined) a year. Your tax advisors can detail the IRS guidelines.
So what are your other options?
Many Americans have recently been taking advantage of two popular PMI premium options!
1.) The first is simply to pay a one-time premium at closing. Again, this premium is calculated based on the Loan-to-Value and your credit rating and could be a significant sum and may not be practical.
2.) The second is a Lender paid PMI that is covered by an increase in Interest Rate. Then, the lender pays the PMI on your behalf in exchange for the higher rate. This option is becoming more popular!
So again, based on a Sales Price of $250,000 and a 720+ credit score, the following details the savings on a purchase money loan:
5% Down Loan amount of $237,500.00: PMI would be $116.77 a month on top of your payment OR you can choose a rate increase of .50% which would reduce your monthly payment by $45.70 and your “interest portion” of your payment would be completely tax-deductible!
10% Down Loan amount of $225,000.00: PMI would be $76.88 a month on top of your payment OR you can choose a rate increase of .25% which would reduce your monthly payment by $43.46 and your “interest portion” of your payment would be completely tax-deductible!
15% Down Loan amount of $212,500.00: PMI would be $35.42 a month on top of your payment OR you can choose a rate increase of .125% which would reduce your monthly payment by $19.71 and your “interest portion” of your payment would be completely tax-deductible!
True, Lender Paid PMI is permanent as opposed to monthly paid PMI. However, national statistics indicate that the majority of first time homeowners typically sell that first home within 3-5 years. If you plan on staying in the home longer, I would recommend calculating the long term impact of a higher rate over monthly paid PMI.
I am always happy to assist home buyers calculate their savings. So please feel free to call me at (904) 509-8272.
(Of course, if you qualify and purchase through the VA, you have *no monthly PMI, but simply pay a one time, up-front “funding fee” that is rolled into your loan. If you secured an **FHA loan, you pay a Mortgage insurance Premium at closing and also had a monthly PMI payment for the life of the loan which you could never cancel.)
*Veterans with a verifiable disability of 10% or more are not required to pay the funding fee.
**FHA PMI rates are due to be reduced as of 1/27/2017.