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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127710  
Subject: Re: Borrower vs. Lender paid PMI Date: 4/16/2013 11:43 AM
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Borrower Paid PMI on my loan would amount to $70/mo. The interest rate will be 3.5%. Purchase price is 150k, and loan amount is 142,500.

Assuming the house appraises for at least $150k, PMI will be required to be dropped after a maximum of 99 months (8 years, 3 months) on this loan, when the principal balance drops below $117k (78% of the original sales price, or original appraisal price, whichever is lower). Upon your request and at the lender's discretion, PMI can be removed when the principal balance is less than 80% of the current value of the home, so it is possible that PMI could be cancelled earlier than 99 months.

On this loan, your P&I payment will be $640, and the cost of the interest for the first month will be $416. Add the PMI cost of $70 to that, and your interest and PMI cost the first month will be $486. This monthly cost will drop from here, as the principal balance decreases.

After 5 years, this loan will cost you $27,912 in interest and PMI.
After 10 years, this loan will cost you $51,550 in interest and PMI.

Interest rate on Lender Paid PMI is 4.125%.

On this loan, your P&I payment will be $691, and your initial monthly cost for interest will be $490 - $4/month higher than the combined interest and PMI payment on the other loan. The interest cost on this loan will also decrease, but the cost of this loan in interest will always be higher than the cost of the borrower paid PMI loan.

After 5 years, this loan will cost you $28,084 in interest.
After 10 years, this loan will cost you $53,114 in interest.

If I go with Borrow Paid PMI, I will pay $30 extra per month until the PMI drops off.

Well, I only see that there is a $21 difference - $711 in principal, interest and PMI on the borrower paid loan vs. $690 in principal and interest on the lender paid loan.

Can anyone tell me whether Borrow or Lender Paid PMI would be better in these scenarios?

The borrower paid PMI loan will cost you less, starting with month 1, assuming you can afford the additional cost of the PMI in your cash flow initially.

Also, does the equation change if we end up staying in the home less than 10 years?

No.

Please note - tax deductibility may change the analysis slightly, but since tax laws are subject to change, while the interest costs are not, the borrower paid PMI loan is probably still the better choice, with any tax benefits assumed to be 'extra'.

AJ
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