rate "adjustment" instead of PMI on a mortgage?

[Scott H.]

Hey all.

Had a question about mortgages.

My employer offers a mortgage program through a national company, good rate, bit of a discount on closing costs, stuff like that.

I called to get a pre-approval the other day, good experience, everything went smoothly.

One little wrinkle though. I mentioned that I assumed I'd be paying PMI since I didn't have 20% down. The agent explained "no, we don't charge your company's employees PMI."

Outstanding!


hold on.


"What we do is adjust the interest rate upwards until you reach the 80% LTV" (this is a 30 year fixed rate.) The scenario example he gave me was if your loan is at 6%, the rate would be 6.75% until the ratio is met.

hmm.

Payment wise it works out virtually the same. 2 years ago it would have been nice because I could deduct the extra interest. Since PMI became deductible in 2007 though, that's now a wash.

My chief concern I guess is with PMI, as much as it may suck to pay it, I have the government backing me up when it comes time to drop it. With this little "scheme" I am at the lender's whim. Don't doubt that I'll definitely want to see the stipulations in writing to be sure.

I guess my question is, has anyone ever heard of this? Is it on the level as far as you know?

[sweeps]

Seems valid, but I'm not convinced that having 6.75% on your entire loan until you hit 80% is better than having, say, 6% on a primary loan and 8% on a piggyback loan. You can pay extra on the piggyback loan and therefore the principal subject to 8% gets smaller and smaller.

I would shop around and compare before taking the offer. Just because your employer is offering this program doesn't automatically make it the best deal.

ETA: Mortgages get bought and sold all the time, so the bank that you get your initial mortgage with isn't a big factor, IMO.

[momof1in150]

I was at a staff meeting and the mortgage broker that our Real Estate office works with explained the same thing.

A big issue is that if you plan to stay in your house for any length of time you can't get out of the higher interest rate once you get 20% equity unless you refinance.

If you make over $100,000 PMI is NOT deductible so this might work for those making over $100K.

It is a new way of creatively financing homes. PMI is expensive and for those who are looking to live in their house less then 10 years and make over $100K then it would be worth it.

[Merch]

PMI is used to protect the lender if you default. It is the lender's insurance ppolicy against you that you pay.

It's probably on the up and up but the lender is limited their risk my charging you more in interest.

[tripods68]

Shop around definitely.

PMI ONLY covers the first 20% of the loan (difference 100% - 80%LTV) in case of default NOT the entire mortgage amount. For example, $265k loan X 2% PMI = $53K. In case of default, PMI would pay lender $53K MAX and not the remaining balance $212K (265-53=*212).

You're actually paying more money on interest alone if you let the lender add higher interest rate to cover your PMI. It's gimmicky to say the least. Because the interest is calculated on the entire mortgage not just on the cost of PMI. You would actualy be saving by paying "stand alone" (exclude PMI from original loan) than waiting for the housing market to bounce back. In fact, the longer it takes the housing market to bounce back the more the lender is making money off of your .75%. Plus PMI shouldn't cost that much either. Ours we paid through FHA $106 a month on a $265K original mortgage amount. Good luck

[poundwise]

I prefer the 20+% down method. No PMI or PMI alternative required.

[ScrimpAndSave]

Poundwise, that is understandable..and I am sure that if the person COULD pt down 20%, they would.

But it is not possible for everyone to do it this way.

And that is why there is PMI.

[Scott H.]

I was at a staff meeting and the mortgage broker that our Real Estate office works with explained the same thing.

A big issue is that if you plan to stay in your house for any length of time you can't get out of the higher interest rate once you get 20% equity unless you refinance.

If you make over $100,000 PMI is NOT deductible so this might work for those making over $100K.

I'm not sure I understand the response. There is no need to refinance, if the plan works as advertised, the rate drop is part of the mortgage. Once you reach the acceptable LTV ratio, it cuts back to the loan's stated interest rate.

Again...as advertised. They don't come anymore suspicious than I am so the lender is going to have to make me feel REALLY secure this won't be an issue. It still remains to be seen whether they can do this.

and as far as not being able to deduct PMI because of income...I can assure you that will not be a problem for me.



Sweeps, you make a good point about doing a 10% piggyback. I'm going to have to crunch the numbers on that. But the declining interest due to declining principal concept works with their plan as well.

Since instead of a fixed .05% per month I'd pay in PMI, the extra amount would gradually decrease since the principal balance is dropping (I could figure what the payment on a second loan would have been and pay that extra amount straight to principal each month since the loan has no pre-payment penalty.)

This of course would require the discipline to make that extra payment but I think I can manage. Still gonna check out your idea though.


Thanks

[momof1in150]

I'm not sure I understand the response. There is no need to refinance, if the plan works as advertised, the rate drop is part of the mortgage. Once you reach the acceptable LTV ratio, it cuts back to the loan's stated interest rate.

Again...as advertised. They don't come anymore suspicious than I am so the lender is going to have to make me feel REALLY secure this won't be an issue. It still remains to be seen whether they can do this.

and as far as not being able to deduct PMI because of income...I can assure you that will not be a problem for me.

There wasn't a rate drop according to the Mortgage Broker we met with. He told us the only way the banks are doing it around RI/MA is that you would have to refinance when you get to 20%+ equity.

[Scott H.]

There wasn't a rate drop according to the Mortgage Broker we met with. He told us the only way the banks are doing it around RI/MA is that you would have to refinance when you get to 20%+ equity.

ahh, I see


no, in this case it's a boosted rate until you reach 20% and then pending confirmation with a new appraisal, the rate drops to the amount stated on the actual mortgage.