Low Money Down & PMI: Who Really Pays?
There is a huge misconception when it comes to mortgage insurance and low down payment programs. I receive many inquiries from buyers interested in purchasing homes with low or no money down, while saving on the costs that are typically associated with mortgages, PMI – Private Mortgage Insurance – being one of them. In order to debunk the misconceptions surrounding these ever changing low or no money down loan products, I thought I would share the advice of my trusted local lender, Craig Messman of Molitor Financial, to help you understand how it truly works.
A 3% down mortgage with no mortgage insurance has many names. However, when you look past the name, you will find that it is a 97% mortgage with lender paid mortgage insurance. Instead of calling it the 97% financing with lender paid mortgage insurance program, the people who get paid the big bucks (marketing dept) have come up with clever names such as:
- Affordable Loan Solution
- Professional Loan
- Agency Affordable Financing
- yourFirst Mortgage
All of these programs advertise 3% down with no mortgage insurance. When it comes to mortgage insurance, there are only 3 different ways to address the mortgage insurance, regardless of the “fancy” name they want to use for the program.
- 20% Down
- Borrower Paid Mortgage Insurance
- Lender Paid Mortgage Insurance
Option 1 – We would have to increase the down payment to 20%, in exchange, there would be no mortgage insurance.
Option 2 – Borrower will receive a lower interest rate, in exchange, the borrower will be responsible for paying the mortgage insurance. Once the loan to value is less than 80%, the borrower can request the mortgage insurance be removed.
Option 3 – Lender will pay the mortgage insurance on behalf of the borrower, in exchange, the borrower will pay a higher interest rate for the life of the loan.
***There is a 4th option, but you would have to put more than 3% down so it doesn’t pertain to this situation. However, just so you are aware, the 4th option would be to do a first mortgage with a home equity line of credit.
***Also, we are not talking about USDA, VA, FHA, Jumbo, etc. Just a conventional 97% mortgage.
So that my friends is how mortgage insurance works. You can call the program whatever you want, you still only have 3 options to address the mortgage insurance component of a 97% conventional mortgage.
For more information on this or any related real estate inquiries or to schedule a call to discuss the best options for you to reach your real estate goals, reach out HERE.
Craig Messman and his team at Molitor Financial operate out of Andersonville, Chicago. As experts in the field and and focus on client service and personal attention to each client, they have been industry leaders for over a decade. Learn more about Molitor HERE.