Question: I am currently deciding which loan option to take.
property value $274,300
option 1: 80-10-10 with no PMI 1st mortgage is a 7/1 @7.75% 1yr Treas+2.75 margin caps 2/6 for $219,440 2nd mortgage is @prime+2.75 or 11% with cap of 2 per period and life cap of 18% for amount of $27,430. I plan to pay off in 7 years
option 2: 89.5 loan terms are same as 1st loan in option 1. 7/1 @7.75 PMI for first year is estimated to be $98.20 per month (0.48%) and $77.75 beginning the second year (0.38%). Loan amount is for $245,500. I have the extra cash for the difference in downpayment.
The plan in either option is to refinance after year 7 at the rate of a 15 year conforming loan. for which I have calculated Ineed to put in an additional $200-$220 per month for option 2.
Which option is the better one for me to take ??
also, if I choose option 2, and make the extra payments I plan, I can reach 20% equity after year 5. How do I get rid of the PMI at that time ? (or can I do that ?).
any hidden cost I should watch out for ?
any comments on this issue will be very much appreciated.
please email replies if possible to syje…@netgate.net
thanks in advance
Answer: PMI premium rates vary by state — your rates in California may not be the same as rates here in Georgia. Let’s use the rates you’re quoting. For starters, here are MGIC’s definitions of Renewals. “Constant Renewals: The annuallized renewal rate for years 2 through 10 is the same as the annualized first-year rate and is applied to the original insured loan balance. For years 11 through term, the annuallized renewal rate is reduced to 0.20%, or remains the same if less than 0.20%, and is also applied to the original insured loan balance.” “Declining Renewals: The annualized renewal rate for years 2 through term is the same as the annualized first year rate and is applied to the outstanding insured loan balance, which will be adjusted at each annual anniversary of the certificate.” I think that the key points here are that 1. for a Declining Renewal, the premium rate doesn’t change — you won’t go from 0.48% to 0.38%, and 2. the annualized premium is calculated on the outstanding loan balance — less each year. Whether or not the renewal is constant or declining is a lender policy, and it’s extremely unusual to find a lender who allows Declining Renewal.
So, to answer your questions: PMI stays with you through the term of the mortgage if you don’t request that the lender let you out of it (more to follow). It’s possible for the premium (dollar amount) to decrease annually under a Declining Renewal policy, but the premium rate (0.48%) will not change. Your lender may have (but, I doubt it) something different available. When the loan-to-value ratio of your first mortgage reaches 80.0%, you may request the lender to let you out of the PMI requirement. The LTV requirement of 80% can be reached by paying down the loan amount (over time or all at once), the value of the property increasing, or a combination of the two. Other requirements for stopping PMI are the real estate market must be stable or increasing, you’ve not been late with any mortgage payments, and you’ll have to get a new appraisal (you pay). Check with the individual lender for their specific requirements.
If that doesn’t answer your PMI questions adequately, let me know. Not knowing what programs and rates are available in California, I’m not going to be able to give you accurate guidance in this area. Here are some options which I have available here in Georgia — they may give you some ideas that you can pursue with your Loan Officer. Combine a first mortgage at 80% LTV with a second mortgage of 10%. I can get a second through Chemical Financial Services (not Chemical Residential Mortgage) at 8.5%. It’s a fixed rate mortgage amortized over thirty years, and due in fifteen years (payments based on thirty years, balloon due in fifteen). No PMI on the first, and a more reasonable rate on the second. Or a “piggy-back”: fifteen or thirty year fixed rate at 75% LTV or $207,000 whichever is less, combined with a 5/1 ARM for the balance up to 90% LTV. The rate on both is currently 8.0%. In your example, the first mortgage would be for $205,700 ($274,300 x 75% less $25 to round down to the next $50 increment), and the second for $41,150. No PMI here, either. If you pay off the principal on the second in five years you won’t face the adjustment and will be left with a single mortgage at 8.0%.
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