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Frequently Asked Questions (FAQs)

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Loan Programs

UP2 Which PMI type is best?

As indicated in our guide explaining mortgage insurance, the applicant will have a variety of methods of paying for private mortgage insurance and can even avoid mortgage insurance altogether by structuring the financing with a dual-loan “Piggyback” transaction.

But which method is best?  The answer depends on factors such as the borrower’s credit scores and on the length of time a borrower will be in the loan prior to paying it in full (usually by refinancing or selling the property securing the loan).

For most applicants with good to excellent credit scores, selecting the single premium method of payment or eliminating mortgage insurance with a dual-loan “piggyback” structure will provide the lowest payment and costs.

The following table illustrates the advantages of those methods over FHA and monthly mortgage insurance.

PMI MIP Matrix

You will notice that the method with the lowest rate of interest (the FHA option) does not provide the most beneficial method of financing.  That’s because although a particular form of financing may provide a lower interest rate, it might have extraordinarily high mortgage insurance premiums.  The table illustrates this fact.  As you can see the interest rate is much lower on the FHA option but because it has both a high up-front premium and a high monthly MIP payment the actual payment is much higher with similar cash required at closing when compared to any of the other three options.

At first glance you might think that the single premium option in the table (SPMI) is the most beneficial since it provides the lowest payment with the least cash required at closing.  However, this particular example rolls the amount of the single premium into the new loan amount (it is financed).  Had the borrower elected to pay the premium at closing the cash required at closing would have been higher.  Whether it is financed or paid it is an additional cost and must be taken into account when choosing a financing structure and mortgage insurance payment method.

Eventually, the savings from the lower payment on the SPMI option will compensate for the higher costs paid.  It typically takes between three and four years for the lower payment on the SPMI option to provide enough savings to recover the extra amount paid at closing (or financed).

An AmeriFund loan consultant can perform an analysis and provide a report that shows the exact month in which the recovery of the pre-paid premium is achieved.  Generally speaking for applicants with higher credit scores the SPMI option will be better provided they do not plan to pay significant amounts of principal during the first few years or pay the loan in full within three to four years.