3 Advantages of Private Mortgage Insurance
Private mortgage insurance offers much more flexibility for home buyers with less than a 20% down payment.
Many home buyers in today’s market will do just about anything to avoid using a FHA insured home mortgage loan.
FHA insured financing is not a bad option. As a matter of fact, FHA financing has lower closing costs, and allows buyers to qualify for a home loan even with a debt to income ratio of greater than 45%.
FHA allows up to 56.9% debt to income ratio for those homebuyers that cannot qualify for Conventional financing.
The primary reason why buyers will avoid FHA financing if at all possible is because of the high cost, and long term commitment required by FHA mortgage insurance premiums.
Private Mortgage Insurance
There are many myths and misunderstanding about using Conventional financing to purchase, or refinance a home. The fact is, many borrowers that qualify for FHA financing also qualify for a Conventional home loan.
It is true that loans with less than a 20% down payment require Private Mortgage Insurance (PMI), which in almost all cases will cost significantly less than FHA permanent mortgage insurance.
Private Mortgage Insurance (PMI) is required for any conventional loan which has a loan to value of over 80%. PMI however, has 3 main advantages that you will not find if you are using FHA financing.
1. PMI Can Be Removed – This is kind of a no-brainer, and it’s worth repeating. Private Mortgage Insurance can be removed by reducing the principal balance of the original loan amount to 80% of the appraised value at the time you took out the loan.
2. Lender Paid Mortgage Insurance (LPMI) – 2013 was the last year that mortgage insurance was allowed to be used as a tax deduction for those taxpayers filing using deduction itemization.
Lender Paid Mortgage Insurance allows the lender to pay the mortgage insurance in exchange for a higher interest rate. Essentially, this is the same as permanent mortgage insurance in the sense that it cannot be removed without refinancing, however, it is now tax deductible as mortgage interest, which may benefit some homeowners.
3. Private Mortgage Insurance rates vary – Based on your loan to value at the time of funding your loan, PMI rates are reduced as your loan to value gets closer to 80%.
When using FHA financing, the mortgage insurance is the same rate no matter if you put the minimum 3.5% down payment, or if you put 15% down and fund the loan at 85% loan to value.
Another rate reduction feature of PMI is income based. Borrowers whose income does not exceed 140% of the Area Median Income (AMI) may be eligible for special private mortgage insurance premiums.
Ask an Expert
With 20 years experience as a mortgage professional, I can tell you that most loan programs identify themselves as the best option.
Depending on your down payment, credit scores, loan amount, and several other factors, usually one home loan option will stand out above the rest.
A mortgage expert will know how to analyze your credit profile, and figure out the best option for you. If you’re calling a phone number from a TV ad, or if you got suckered into calling a mortgage call center, it’s unlikely that the person answering your call will have any idea of what we’re talking about here today.
If you have questions, feel free to leave it below, email or give us a call.