PMI insurance and getting a loan when the purchase value is significantly less than the appraisal.?

Question

We are purchasing a home where the purchase price is much less then the appraisal. The actual value we are borrowing is less than 80% of the appraisal value. We will then put a downpayment of 5% on the loan when we close. Do we still have to pay PMI if the loan value is less than 80% then the appraisal value??

Answer 1

Yes, you would still be required to pay mortgage insurance. On a conventional purchase transaction lenders always lend off of the LOWER of the appraised value or purchase price. In your case you believe you are buying the home below the market value indicated by the appraisal (keep in mind real estate appraising is INCREDIBLY subjective). The lender will consider the transaction a 95% purchase, in that they are lending you 95% of the price and disregard the higer appraised value.
There are options to avoid paying mortgage insurance, but I encourage you to "do the math" first. Mortgage insurance is not the pariah it has been made out to be. You may find that borrowing 95% and paying the PMI is more cost effective than, say, closing 2 loans (one for 80% and one for 15%) which is a traditional pmi work around.
One final thought, if you are buying the home from a relative, than what I have just shared may not apply. There are ways to take advantage of a below market sale when the transaction is between relatives using a "gift of equity".

Answer 2

First of all you should thank jason n for being someone talking on this subject that actually knows what they are talking about. Out of all the answers that you have received only one of them is right, and when mine posts, you will have 2 that are correct answers to your question.

PMI is NOT a bad thing. PMI came into play years ago to assist people in being able to buy homes without having to put 20% down on the property. Furthermore, it is an insurance policy protecting the lender from default. It is not a bad thing.

Secondly, on the subject of your loan, you will have to pay PMI. This is not a state requirement, as you have been told. This is a lender requirement and it does not vary by state. Here is an example. Let's say that you were buying a home for $100,000.00, but the actual worth of the home is $1.5 million dollars (yes...this is a very hypothetical analogy here). If you were to put 5% down on the home, your actual loan to value would in fact be 95%. So, you would be paying PMI.

Just like in your situation, it is the purchase price that determines the value in a home purchase, not the appraisal. The appraisal is only used in an effort to protect the lender and the buyer in insuring that the home is worth at least what it is being bought for.

Now, there are loans out there that would not require you to pay PMI, but you would be paying higher interest rates on these loans. You could argue that the interest is tax deductable, adn you would be right. So, your best bet would be to have a tax professional involved and ask them to give you what the difference would be between taking a higher rate and no PMI, or just accepting that you will be paying PMI.

I would say that your best bet would be to pay the PMI since it will drop off. An interest rate will not drop off without paying more fees in a refinance later on down the road.

Good luck!

Answer 3

No, I don't believe so. If you are being told this, go to another lender. Try to find someone who isn't a mtg. broker, because they get a commission that's a percentage of what you borrow. Go to a bank where they write their own loans.
PMI is based on the value of the home, not the purchase price. So you should not have to have PMI.

Much Love!!

Answer 4

Not in Michigan, you wouldn't have to.. and some lenders will even give you two mortgages, one for just under the required amount, for instance in Michigan, 80% or more, you have PMI.. so if you wanted, get a mortgage for 75% and one for say 15% or so.. and you still only make the one payment, a little loophole around PMI.

You should just ask your lender though.

Answer 5

Usually you don't. I've closed on many many 100% loans that don't require it.

Some lenders put it in in "hopes" you won't notice or will think you HAVE to have it. It may not be a cut in stone requirement. Ask to see their policy on PMI requirements and why exactly they are requiring you to have it.

If they do require it, find out at what LTV (loan to value) percentage you can have it removed at.

Don't be afraid to ask them to be up front and precise in their explanations. The more you make them accountable, the less they can take advantage of you. Negotiate and ask questions!

Good luck :)

Answer 6

Hello,

The answer would be Yes and No. Please let me explain.

P...M...I... Three letters which become very important for anybody looking to buy or refinance a home. An acronym for private mortgage insurance, PMI is needed whenever you have less than 20% equity or cash down payment for a new first mortgage. Ask anyone you know about it, and they'll most likely advise you to avoid PMI at all costs. This is often referred to as common financial wisdom. What you're about to learn, however, is that common wisdom isn't always common, or correct. In some cases, choosing a mortgage with PMI actually makes sense.

PMI is nothing more than insurance that will cover the lender in the event the borrower falls into default, causing the lender to foreclose. PMI does not benefit the borrower directly other than helping many buyers to qualify for a mortgage and finance their home.

It is important to know that PMI isn't always required if you don't have the funds available to reach that 20%. A skilled mortgage professional will advise you that avoiding PMI can be accomplished by taking out a second mortgage for the amount needed to close. In other words, if you were purchasing a home for $250,000 and only had $25,000 available for your down payment, you could choose to take a first mortgage in the amount of $200,000 and a second mortgage in the amount of $25,000.

The second mortgage could be in the form a home equity line of credit or a traditional second mortgage. The traditional second mortgage would be a loan for a specified term of five to thirty years. In most cases, it would be a term of fifteen years.

There are advantages and disadvantages to each of these second loan options. The primary benefit of choosing a Home Equity Line of Credit, or HELOC, is the payment. Most HELOCs are set up with the option of making an interest-only payment, allowing for greater monthly cash flow. There are, however, two disadvantages to a HELOC. The first is that they are subject to monthly adjustments tied to the Prime Interest Rate, which has been increasing steadily. The second is, unless you make a payment above the required amount, your balance owed will remain unchanged so you won't be making progress on your debt.

Second mortgages that come with a fixed interest rate and term offer the benefit of a locked interest rate and payments which are applied toward interest and principal, decreasing the amount owed with each payment. The disadvantage to this kind of mortgage is that the minimum payment is higher than it would be with a HELOC.

Here are three examples of how to finance a home valued at $250,000. They will show you the differences between financing 90% of the value with PMI, a HELOC, and a traditional second mortgage. Please note that the interest rates presented here are for illustration purposes and may not be in effect at the time you actually apply.

One other thing to consider when choosing a mortgage is the amount of time you will actually have the mortgage in place. As interest rates fluctuate and as situations in life also change, people rarely have a mortgage in place for thirty years. We will look at what the total costs would be if your financing were in place for five years.

PMI HELOC Closed End
Second
First Mortgage Amount $225,000 $200,000 $200,000
Interest Rate 7.00% 7.00% 7.00%
Term (Months) 360 360 360

Payment (P&I) $1,497 $1,330 $1,330
Mortgage Insurance $98

Second Mortgage Amount $25,000 $25,000
Interest Rate 9.50% 8.80%
Term (Months) Interest Only 180

Payment (P&I) $198 $251

Total Payment $1,594 $1,529 $1,581

If your home appreciates at a rate of 5.00% per year, you will be in position to have PMI removed from your mortgage after the second year. There is now enough equity in your home to cover the lender in case of foreclosure. If you had your PMI cancelled at this point, your mortgage payment would be reduced by $98. Regardless of what happens with your home's value, if you'd chosen either of the second mortgage options your payments would not change. This also assumes no change in interest rates in the case of a HELOC.

If you take into consideration the total payments made, the amount of principal paid, and your remaining balance at the end of the five year period, the least expensive choice is a closed end second mortgage. The most expensive option is a HELOC, even though your monthly payment is less.

The reason for this is your total amount owed at the end of the five years is $1,467 more based on the HELOC payment being interest only. If interest rates rise from where they are today, this option becomes even more expensive.

There are several things to take into consideration when financing your home. It's advisable to speak with a mortgage professional who can show you the different options available based on the time you expect to live in the home or have your mortgage in place.

These examples are for a home purchase, but the same principals apply if you are looking to restructure your finances. Interest rates have risen dramatically in the past few years for HELOCs, credit cards, and student loans. Contact your mortgage professional today and ask for a total analysis to determine if consolidating your debt into a new first mortgage makes sense. In many cases, this will be true even if the interest rate on a new first mortgage is higher than the one you currently have.

Your mortgage professional can show you the blended interest rate you are paying for all your debt, both mortgage and consumer, and determine the best course of action for you.

Please also note that now available in the marketplace is a product called a single file, which is a loan which does not include PMI.

Answer 7

check with your mortgage broker/lender. for the most part, if the LTV is less than 80%, then no PMI is required.

Answer 8

Not in my state but different states may have different laws. If you are being told that you have to purchase it, call around to other lending institutions and ask. It never hurts to shop.

Answer 9

it's based on the purchase price.