Is a PMI-free loan a good deal?
I am in negotiations for my first house. I am a little shy of 20% for the down payment, but can probably get there in 3 to 6 months.
I was offered a 30 year PMI free loan if I put 5% down, but I can get a lower interest rate with a normal loan with PMI.
Should I wait until I can afford the 20% down and take the normal loan with the lower interest rate, or buy now?
Answers | 4
Part of the answer depends on where home values are trending in your purchase zone. If values are increasing, my advice would be to opt for the lower rate plus PMI loan. The reasons are as follows -
1. If you're close to that 20% equity mark, the upward trend of home values combined with your principal payments on the mortgage should carry you relatively quickly to that 20% mark. You can then request to have PMI cancelled off the loan
2. Rates are still at all time lows. After yesterdays remarks from Fed Chairwoman Janet Yellen, and the extremely negative reaction in the bond markets, we could be seeing rate hikes coming very shortly. I think locking in your low rate now is the prudent move.
3. PMI may be tax deductible for you...check with your tax advisor.
Even if home value trends are not moving up, PMI may still be a good choice because of the rates and because eventually, the home you are looking at may be a higher price later on.
It depends as what your short-term and long-term goals for the property are and also what is the rate difference between the two different programs.
Generally speaking, there is no such a thing as PMI-Free loan program. if you are putting less than 20% down, you are subject to Mortgage Insurance, however there are different products out there which would allow the MI to be built-in to you rate so you don't pay a separate fee.
As for the Mortgage Insurance, let's talk apples to apples.
Ask your lender the Mortgage Insurance factor. Let's say it's 0.42. This is like adding 0.42% to your interest rate, for the time that you have Mortgage Insurance. (For a conventional loan, Mortgage Insurance can go away after two years with at least 20% equity.) So a 4% rate is effectively 4.42%.
You might be better off putting down less and buying out the Mortgage Insurance or getting an Lender Paid Mortgage Insurance product (Mortgage Insurance without the monthly fee) or using a 2nd mortgage.
There are trade offs in all of these.