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"I've bought a number of homes over the past
20 years, and I opt for lender-paid PMI because I move often and
don't build up that much equity, so it's better to write off the
PMI," says Vicki Rosenthal, a credit policy analyst with MGIC,
a PMI insurance company.
For other consumers, a piggyback loan might be the
best option. Walters recommends that consumers shop around for a
mortgage broker or lender that offers a number of options and that
will help them compare the costs and benefits of each.
"If you aren't being offered a structure that
allows you to avoid PMI, you need to look elsewhere," he says.
"Some of the very biggest mortgage brokers don't give you that
option because they have a vested interest in mortgage insurance."
PMI by any other name
In any case, don't be fooled by name games. A number of lenders
are pitching subprime loan products touted as PMI-free. If you're
attracted to such a product, look before you leap, because it may
not be any cheaper than a loan with PMI.
"Many subprime loans don't have PMI because the
PMI companies won't write insurance for those types of loans,"
says Walters. "If this is the case, the lender will insure
against the risk in another way."
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These other methods of risk management
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Lender-paid PMI is a strategy similar to those above,
as is a piggy-back loan. "In some cases, the higher interest
rate carried by the second and/or third piece of the piggy-back
more than offsets the cost of what you'd pay in PMI," says
Andrew Housser, managing partner at Bills.com. "Whether you
pay PMI or not, lenders make sure to offset the higher risk entailed
in lending to consumers in the subprime category."
Walters agrees.
"It's all money that comes out of your wallet
no matter what you call it," he says. "Call it PMI or
a higher interest rate or whatever you want, because there is no
free lunch."
It's up to you to educate yourself and to run the numbers to determine
which strategy makes sense for you and which will result in lower
payments.
And since individual situations vary so much there are no hard
and fast rules that dictate who pays what because it depends on
how different factors come together in terms of your credit score,
your loan-to-value ratio and the amount of your down payment.
So a lender could offer you, say, a no-PMI loan at
11 percent with a PMI charge of 0.5 percent built into the price
of the loan or a loan with PMI at 10 percent with PMI that adds
a payment equal to 0.5 percent to your loan -- which is better?
In this example, the loan with PMI would be better. So crunch all
the numbers and add up all the fees to make sure you're getting
the best deal available.
Your closing and PMI
Anyone who has bought a house knows that the estimates of closing
and other costs are usually lower than what you actually pay at
closing. Often PMI is no exception.
"We have clients that were initially given a
good-faith estimate of $50 to $75 a month in PMI costs and then
they find out at closing that the actual PMI rate is hundreds of
dollars higher," says attorney Terry Smiljanich of the James
Hoyer law firm in Tampa, Fla. "In many cases, this is because
their PMI premium was initially based on the premise that the borrowers
were in a good credit quality category, when they actually ended
up in a subprime category."
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