PMI question...

[ScrimpAndSave]

Is PMI based on the mortgage amount or the amount that a house is assessed for?

Example:

If a house is assessed at a value of $320,000, and I get it for $300,000 - is my PMI based on the assessed value of $320,000 or the mortgage amount of $300,000?

Thanks!

[kork13]

My understanding is that it is based on the mortgaged amount... I've heard of rates averaging between $50-$65/mo per $100k financed. So for a $300k mortgage, you might be looking at around $2000/yr for PMI.

However, if you can manage a 20% downpayment ($60k in this case), you can generally avoid PMI entirely.

[jIM_Ohio]

Both.

If you do not own 20% of assessed value (20% of 320k in your example is 64k), then you are assessed PMI based on the amount you borrow (300k in your example). Each lender will calculate PMI differently. $50-$65 per month per 100k borrowed sounds about right.

do some math-
320k house
10% down (32k) and then compare
90% first mortgage (288k) financed (6% is PI of 1730) with $187 of PMI total payment of $1917 interest pd first year is17k (get 4.25k back)

or
320k house
10% down, 10% o 2nd mortgage
80% first mortgage
1st mortgage would be 256k financed (6% is PI of $1534)
2nd mortgage would be 32k financed (9% is PI of $258)
total payment is $1792
interest is 15k+ 3k=18k, get 4.5k back
lower overall payment with higher tax benefit

you reach 20% equity faster in 2nd situation (because you are paying principal on two loans) and have an estimated tax savings of $250 in year 1, plus an extra $187 per month you could use to apply to 2nd mortgage and get to 20% equity even faster.

[ScrimpAndSave]

Thank you for clarifying that.

I know that some point, when 20% of equity is reached, PMI can be stopped.


So if I get the house for $300,000...and I put 10% down ($30,000)...then all I really need is $10,000 more considering the fact that the house appraises for $20,000 more...does this make sense? So in a few years, when I have house appraised...will they consider what I have paid down, what I have paid into the principal and also the extra $20,000 that the house is worth? This would equal the $60,000 that I would initially need.

Sorry...not sure how to word it...do I make sense?

[jIM_Ohio]

Thank you for clarifying that.

I know that some point, when 20% of equity is reached, PMI can be stopped.


So if I get the house for $300,000...and I put 10% down ($30,000)...then all I really need is $10,000 more considering the fact that the house appraises for $20,000 more...does this make sense? So in a few years, when I have house appraised...will they consider what I have paid down, what I have paid into the principal and also the extra $20,000 that the house is worth? This would equal the $60,000 that I would initially need.

Sorry...not sure how to word it...do I make sense?

You are on the right track.
At closing an appraisal will be done on the house. Best gift your father could give you is a sales price of 80% of appraised value (then the whole 80-20 or 90-10 discussion is moot).
Maybe you make a backdoor deal to give father another 5-10% of appraised value (pay him 1% of value per year for 5 or 10 years, for example) once house closes.

If you buy house valued at 320k, (based on the appraisal), then the bank wants to see you own 64k. That might be 30k down, purchase price of 300k and 10k on a second mortgage.

I would check with an attorney on this (fiance might come in handy after all) to make sure there is not a law against marking down the asset when selling to family. In my tax course I remember an issue with this in one particular lesson, but I would need to re-read for specifics- you cannot sell below FMV to a family member or something like that. FMV is fair market value. Not sure if that was real estate, a business or something else (I think it was in business deals).

It is possible the 20k difference gets taxed to you as income if what I am thinking applies to real estate. I do not think this is that, but you need a tax person or an attorney to check that out.

[ScrimpAndSave]

Thank you Jim.

I guess I was trying to figure out if it is better to take out a 2nd mortgage or just pay the PMI.

I think it is unavoidable that my father and I will have to speak to an attorney to see what happens. Plenty of houses around here right now are selling for less than FMV...so my dad feels like he wouldn't ever get 320k for it...300k is a possibility.

I will have to check with an attorney...my fiance hasn't taken that class yet! Ha!

[jIM_Ohio]

Thank you Jim.

I guess I was trying to figure out if it is better to take out a 2nd mortgage or just pay the PMI.

I think it is unavoidable that my father and I will have to speak to an attorney to see what happens. Plenty of houses around here right now are selling for less than FMV...so my dad feels like he wouldn't ever get 320k for it...300k is a possibility.

I will have to check with an attorney...my fiance hasn't taken that class yet! Ha!

The issues would be in the tax code and the gifting code in particular or the small business code in particular.

There was something I read which "restricts" the amount of business which can be done between family members (I assume this is to prevent working around estate tax issues).

[FrugalFish]

If, by any chance, you will be getting an FHA loan (which carries MIP), then they require that be paid for a minimum of 60 months before it's removed. You also can't remove FHA MIP with an appraisal. It's based on the original loan amount and can't be removed until 22% of the original loan value is repaid.

No idea if you are thinking of going with an FHA loan, but it's good to know this just in case. Can't tell you how many people I know who thought they could dump their FHA MIP after only 1 year by getting a new appraisal.

[ScrimpAndSave]

Frugal fish...this is good to know. I don't plan on getting an FHA loan. But good to know!