monthly PMI OR lender paid PMI (higher mortgage rate)

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mesaverde
Posts: 411
Joined: Wed May 02, 2007 4:14 pm

monthly PMI OR lender paid PMI (higher mortgage rate)

Post by mesaverde » Sat Apr 07, 2018 5:51 am

On Monday I will be locking in a mortgage rate on a condo I'm purchasing. I plan to live in this condo for 10 years minimum, probably much longer.
I've been saving approx. $1,000/month in the Vanguard Prime Money Market Fund (taxable account) for a down payment. Currently I'm only able to put 5% down (I'd need to continue saving at this rate for at least 4 more years to have 20% down and to me that's not an option).

After purchasing the condo, I would still have an emergency fund in place, so would not need to build that back up. I will still be able to save approx. $1,000/month after purchasing the condo.

The purchase price will be $315,000, and loan amount $299,250. Estimated closing costs $5,500.
Earlier this week the lender gave me this quote with two options- monthly PMI or lender paid PMI (higher rate).
Option 1:
4.625% 30 year fixed (no points/origination fee)
$95/month mortgage insurance (until loan to value ratio reaches 78%)

Option 2:
5% 30 year fixed (no points/origination fee)
No monthly mortgage insurance

Which do you think would be the better option, and why? Considering that I'll likely live here for a long time, I'm leaning towards option #1 because after moving in I can pay the loan down by $1,000/month to eventually reach 78% LTV, and retain the lower interest rate. At that point I'd probably stop paying down a (historically low rate) mortgage. But the simplicity of option 2 is appealing & I wouldn't feel pressured to put all savings into an illiquid asset.

Any tips/insight would be much appreciated!
"Learn from the past, live in the present, plan for the future"

tmcc
Posts: 129
Joined: Tue Feb 06, 2018 6:38 pm

Re: monthly PMI OR lender paid PMI (higher mortgage rate)

Post by tmcc » Sat Apr 07, 2018 6:41 am

definitely the 4.625%

at least when you hit 80% LTV you'll have a lower rate for the remainder of the loan period. you'd forgo the higher interet rate deduction on the tax side but then again you wouldn't have to pay the interest at all then.

SimonJester
Posts: 1573
Joined: Tue Aug 16, 2011 12:39 pm

Re: monthly PMI OR lender paid PMI (higher mortgage rate)

Post by SimonJester » Sat Apr 07, 2018 8:48 am

4.65% for sure:
To put some example numbers the quick mortgage calculators online show the following (note does not include insurance and taxes)

5% loan no PMI
$1,606.44 monthly payment
$279,067.30 total interest paid

4.65% $95 PMI
$1,638.04 monthly payment
$256,247.01 total interest paid


As you can see the monthly payment is only $32 more with PMI due to the lower interest rate.
The standard amortization rate would remove PMI in about 9 - 10 years.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

mesaverde
Posts: 411
Joined: Wed May 02, 2007 4:14 pm

Re: monthly PMI OR lender paid PMI (higher mortgage rate)

Post by mesaverde » Sat Apr 07, 2018 2:43 pm

Thank you for the feedback... I think I will go with the monthly PMI.
"Learn from the past, live in the present, plan for the future"

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