Why No PMI Loans Are Stealing FHA’s Market Share for First Time Home Buyers Loans
Getting a home loan with less than a 20% down payment is not difficult. It is a myth that you need to have that large of a down payment in most cases to buy a home. You may have seen or heard advertisements about no PMI loans as they are more available than ever. The mortgage with no PMI is a very desirable choice to successfully become a homeowner in 2018.
But if you do buy a home with less money down, you usually need to pay for mortgage insurance, which is referred to as PMI for conventional loans. PMI is insurance that pays back the lender if you default on the mortgage. There is a higher chance of default when you put down less than 20%. People with less skin in the game are more likely to walk away from their mortgage when things turns south financially.
People with lower credit scores and less than 20% down often turn to government backed FHA mortgages, which offer low down payments of 3.5% and the possibility of getting a home with only a 580-credit score. FHA loans have long been the go-to option for people with less money down and bad credit. But FHA home loans usually require mortgage insurance for the life of the loan, and this can get very expensive over time. The only option in most cases to escape mortgage insurance with an FHA mortgage is to refinance to a conventional loan.
But today, there are other mortgage programs out there that offer low down payments for people with low credit scores, and the PMI requirement may be waived for some people. These types of loan programs could steal market share from FHA.
One of the mortgage program options is the Affordable Loan Solution from the Bank of America. It is designed to be a cheaper option than the FHA program. This program has many benefits, one of them being the PMI requirement is often waived. This is one of the reasons why so many people are refinancing FHA loans to get rid of mortgage insurance.
Obviously, the appeal of having your PMI requirement waived is that your monthly payment will be lower. This new loan program is supported by Freddie Mac, so the borrower will not need to pay any type of mortgage insurance. This can save you $100 or $200 per month and is a big difference in your monthly payment.
To be eligible for the no PMI loan program with BofA, you need to have a 660-credit score and an income that is lower than the median income for the surrounding area.
Lender Paid PMI Loans
There are other options available to avoid paying PMI. Many mortgage companies offer lender paid PMI home loans, or LPMI loans. With an LPMI mortgage, you will pay a slightly higher interest rate to make up for not paying PMI. Lender paid mortgage insurance is not a new concept but the new lending versions continue to soar in popularity.
You can expect a mortgage rate of .25% to .5% higher when compared to other home loans. Is this a good idea? There are several factors to consider.
On the positive side, you will have a lower monthly payment with no PMI to worry about. If you have a loan of $200,000, you may save $60 or more each month with your LPMI loan.
Second, you do not need to put 20% down, so your upfront costs will be less. You may be able to put down only 3% or 5%. FHA loans require 3.5%, but they always require mortgage insurance.
On the negative side, always remember that an LPMI loan will have a higher rate. If you plan to sell your home within three or seven years, paying a higher interest rate may not be that important. But if you hold the home for 10 years or longer, you will pay more in interest than you saved by having PMI waived.
Also, keep in mind that interest rates are on the rise in 2018. The days of sub 4% 30-year fixed loans are gone for the foreseeable future. Rates in 2018 for these loans are in the range of 4.6%. So, if you get an LPMI loan, you will pay a premium on top of that higher interest rate. It would be wise to walk through what the costs of the LPMI loan will be over time, compared to your PMI costs. The LPMI option will certainly cost you more in 2018 and 2019 than in years’ past.
Last, LPMI loans cost you more if you have poor credit. The lower your score, the higher the rate you are going to pay. You might be able to buy down the interest rate by paying points up front, however.
Overall, there are more options today for mortgage loans with no mortgage insurance that compete with FHA. But whether you should get a conventional loan with no PMI, lender paid mortgage insurance, or an FHA loan is a complicated question. Go over the various options with your mortgage lender to determine which option will save you the most money over the short, medium and long term.