Let's say I only have a 10% down payment so I have to have PMI. Do I have to pay that for the entire life of the mortgage or can I stop paying it after I have an equity position of 20% in the house? If that's the case, would I be better off getting an 80/20 loan (or in this case 80/10)? Any. show more Let's say I only have a 10% down payment so I have to have PMI. Do I have to pay that for the entire life of the mortgage or can I stop paying it after I have an equity position of 20% in the house?
Many lenders offer an alternative like an 80/15/5. I have one on my current home (which is my first home) - the 15% portion is a 2nd fixed rate mortgage at a higher interest rate (7% vs 5.75% on the 30-year fixed portion), amortized over 30 years, but due in 15 (i.e. a balloon that would need to be paid or refinanced). So, these make more sense for first time
buyers who a.) don't have the cash to front 20%, and b) don't plan to be in their first home for a long time to bank on appreciation (very important considering the short-term uncertainty of the real-estate market).
Based on the monthly PMI quoted to me, on an after tax basis (since the add'l interest is tax deductable), the 80/15/5 proved more beneficial by a factor of almost 4x.
For reference - on a $200K home assuming 10% down and 6.25% rate, it would take you until your 92nd payment (over 7 1/2 years) to pay down the add'l 10% ($20K) in principal to get to a 10% stake and eliminate PMI.
Another alternative - assuming your loan agreement allows - you could make additional payment(s) which would go straight to principal and shorten the term. Paying an additional $100/month would get you to 20% in roughly 30 fewer payments (i.e. after about 5 years).
This is a nice, low-risk alternative if month-to-month cash availability, has a better outlook than a lump-sum right now.
RP18 · 8 years ago