Until the advent of jet travel and international phone calls, most Americans lived in just one home for their entire lives. In fact, generations of a family would often live in the same home for decades and sometimes even centuries. Multigenerational family homes were common from coast to coast in America with grandparents, their children, and their grandchildren living under the same roof. Families of that time had to scrimp and save to buy a home because, before 1900, mortgage financing to purchase a residence was not widely available. If a home cost $10,000, the buyer needed all $10,000 in cash to purchase the property. After the federal government created FHA in the 1930s, mortgage financing became available to many Americans, and after the US GIs returned from World War II in the late 1940s, FHA and VA financing fostered a housing boom for the families reunited after the war’s end. As air travel and telephone service improved nationwide, families began living in separate homes and very often in different states. The United States became a much more mobile society and the amount of time Americans  spent living in a particular home shrunk from decades to only a few years by the turn of the 21st century. The children of the WW2 veterans were later nicknamed “Boomers” because they were the offspring of millions of men and women who returned to the USA in the late 1940s and early 1950s at the conclusion of the war. Those ‘baby boom’ children themselves became old enough to buy homes by the late 1960s but saving the 20% required for a down payment  at that time was difficult. In the early 1970s, an insurance executive created a type of insurance that would allow lenders to accept less than a 20% down payment when buying a home. This type of “mortgage insurance” insured the lender against loss should a bank be forced to foreclose on a home where the borrower had made less than a 20% down payment. Thus, Private Mortgage Insurance was born, and accessibility to home ownership grew by leaps and bounds. Today, this type of mortgage insurance called PMI, for short, allows home buyers to finance the purchase of a home with as little as 3% down on a conventional loan, 3.5% down on an FHA purchase, and $0 down on specialty loans like USDA Rural Housing. PMI is now a well-established fixture in the mortgage industry that many homeowners try to avoid at the time of purchase or eliminate as soon as possible after they buy a home. Many of us wonder if there are ways to avoid or eliminate PMI and most mortgage lenders fail to inform their prospective borrowers about the many options available to them to accomplish exactly this. But there is a smart way to structure a loan to minimize the impact of PMI on the borrower while still utilizing the advantages that mortgage insurance provides to the average home buyer.

PMI is added to most conventional loans where the borrower is unable or unwilling to make a 20% down payment when purchasing residential real estate. The amount of PMI varies depending on many factors, but the main two issues that impact the cost are the loan-to-value ratio (the size of your down payment) and Credit Score (your Fico score).

Other factors like the type of home, the occupancy type, the loan size, and even the number of borrowers can impact the cost too. Typically, a home buyer with less than a 20% down payment will accept PMI on their new mortgage loan and will pay the insurance premium in monthly installments which are included in their mortgage payment. FHA loans require mortgage too , called MIP, regardless of down payment size, Fico score, or property type. However, there are options to reduce or eliminate PMI on conventional loans that are worthy of discussion. Among these options, we can point to self-insured loans, combination loans, and loans with PMI where the payments are made either entirely or partially using a single premium. Self-Insured loans are usually portfolio-style loans where the lender is insuring the loan against possible loss by increasing the interest rate to cover this liability. These loans usually feature higher than market interest rates as well as innovative ways to document the borrower’s income, and less stringent credit requirements. Combination loans or “piggy-backed” loans do not require mortgage insurance because care is taken to make the structure a combination of two mortgages adding up to the needed loan amount. The first mortgage is usually calculated at an amount less than 80% of the sale price, and the 2nd lien is added to achieve the desired total loan total. These loans are very popular, and the only drawback would be the interest rate on the 1st lien is a bit higher than normal because of the presence of a 2nd lien, the 2nd lien is at an even higher rate than the 1st lien, and the 2nd lien is often an adjustable-rate loan of some sort. Single premium loans are the ‘hidden gem’ of the PMI world and bear a full discussion.

Single premium mortgage insurance or SPMI is a seldom offered but very powerful version of PMI that most lenders fail to offer to their mortgage borrowers. We have found it to be extremely helpful to homebuyers impacted by recently rising mortgage interest rates and can dramatically lower your monthly mortgage payment. They work like this: you pay one single fee or ‘premium’ to the PMI company at the time of closing, and in return, you receive PMI coverage for the life of the mortgage, but you never pay another dime for it. You never make another monthly PMI payment because you paid in full for your coverage with one single premium at the closing. This single premium can be paid in cash, or it can be added to the loan amount so that the ‘cash to close’ is not impacted. Many home buyers have realized that they can reduce their total down payment to free up some of those funds to pay for a single premium mortgage insurance policy and end up lowering their overall monthly mortgage payment by hundreds of dollars. There is another version of this type of policy where the borrower pays a split premium…some at closing in a lump sum and some included in the monthly payment amount…which can benefit some borrowers under specific circumstances.

Finally, many homeowners who originated a mortgage which included PMI initially can petition their servicing lender to cancel the PMI policy early under certain circumstances.  Contacting your lender’s servicing department will provide you with the terms and conditions of this option.

Contact me or my team at WasiekoTeam@vipmtginc.com for more information regarding any of the topics discussed in this article.