What is the difference between PMI and an 80/20 loan?

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This ties back to my previous question, my friends are being told their monthly payments will be around $ 1200 for a $ 120K house using a 6.7% interest rate on a 30yr fixed. Seems impossible to me when comparing to amortization tables (I come up with 800/mo).

Some of the answers told me the explanation could be PMI which I know means “Private Mortgage Insurance” but not much other than that…

For my house I have a 80/20 loan since I put no downpayment and my rate is about $ 1300 a month, but my house was $ 185K

I don’t understand how they could pay only $ 100 less than me for a house that costs so cheaper, so please explain this PMI and why they just cant get an 80/20 loan?
Yes, I have two loans. One for 80% at 6.3% and one for 20% at 7.1%

I had 20% for a downpayment but decided to keep that cash for other purposes once I realized I could get two loans instead.
Also, this is definitely for a 30 yr fixed, not a 20 or 15 loan.

Second, my tax rate in my county is slightly higher than theirs.

  1. Reply
    May 1, 2011 at 4:12 am

    They may not qualify or want an 80/20 loan. 80/20 loans will have a higher “blended” interest rate (the total rate based on combined monthly payment).

    For instance, your 80% loan may be at 6.5%, but your 20% at 8.99%, so your blended rate may be in the mid 7’s. Whereas, if you took a PMI loan, your rate may be at 6.5% fixed with a temporary PMI payment for the first 4-6 years you have it.

    The payment can be higher on an 80/20, but it also can be higher with the PMI, it depends on other factors like credit score, income verification, job history, property type.

    PMI is insurance, its based on the amount of coverage, $ 400 for $ 120,000 in coverage is astronomical. As I said earlier, I’m a mortgage broker and the most I’ve seen for that kind of loan amount if $ 150.00 per month. Thus, there is probably something else going on with your friends.

  2. Reply
    May 1, 2011 at 4:25 am

    PMI is insurance. It is required on all first mortgages above 80% loan to value. The PMI company will help cover losses in case of forclosure. 80/20’s were the way to go in recent years because PMI was not tax deductible and second mortgage rates were low. PMI is a better option know, in my opinion.

  3. Reply
    May 1, 2011 at 4:59 am

    My $ 1350 month covers a $ 230 K loan for a true 80/20 !
    Total monthly payment is P I T I > Principal , Interest ,
    Taxes and Insurance ( regular house insurance ) .
    If you do not have 20 % down payment ( the 80 / 20 means 80% financed / 20% down ) then you will pay extra mortgage insurance also called PMI .
    If you have the 20% down , there is No PMI .

    HOW do you have an 80/20 with no down ?
    The only way would be a second mortgage that funded the 20% down . . . (2 loans)


  4. Reply
    May 1, 2011 at 5:17 am

    PMI or private mortgage insurance insures that the mortgage will be paid. In todays economy with defaults so high.. PMI costs a lot..

    80/20 means that the first 80% is the mortgage and the last 20% is a second loan… usually one that carries a higher interest rate. and it is usually considered an unsecured loan..so it can take grood personal credit to get one..

    A client of mine defaulted on an 80/20 mortgage.. they had to pay $ $ to get out of the 80 mortgage after the default and had to pay 100% of the 20 mortgage personally.. so for some lenders an 80/20 mortgage carries less risk.

  5. Reply
    Kandy M
    May 1, 2011 at 5:27 am

    There are several possible reasons for this.

    First, this may include escrows. Taxes, insurance and PMI payments. Which may be higher for their house compared to yours.

    Second, the type of loan that they get is signifigant. They may have a 15 year loan compared to a 30 year loan.

  6. Reply
    May 1, 2011 at 5:41 am

    Okay, first of all, the PMI is insurance that protects the lender from you walking away. Whether or not this is required is based on the Loan to Value ratio. The more of the home’s value you borrow, the more likely the bank is to get hurt if you bail, so they usually want PMI if you go over 80. That’s why the 80/20 loans were devised.

    One thing you have to consider on an 80/20 is that the 20% loan is usually at a higher rate, like up to a full percentage, and they usually have a “balloon” meaning you pay as if it were a thirty year loan, but it’s all due in fifteen. That scares some people.

    Now, there are a lot of other factors that can make the difference in payments besides PMI and loan value.

    Taxes may be different, and so might insurance. There’s also the term of the loan, and the interest rate.

    Why can’t they get an 80/20? Well, could be credit scores, could be the appraised value of the house. Could be that they don’t want two payments. Maybe the balloon scared them off. Maybe the interest rates were so much higher.

    Remember also that PMI isn’t a permanent part of the payment. After a year or two, if they’ve paid diligently, and the appraised value is high enough above the loan, they will stop charging PMI… on request, of course, so the homeowner has to do something about it.

  7. Reply
    May 1, 2011 at 6:34 am

    I did the math too. Princ + Int = $ 774 Est tax $ 105 Est PMI $ 90 Est Home Owners INS $ 55 = $ 1024. The only thing I can think of that might boost it to $ 1200 would be the possibility that the property is an investment property requiring more expensive insurance and/or that it lies in a flood zone requiring federal flood insurance (and possibly if the loan amount is more if the buyer is including closing costs and pre-paids).

    The bottom line is that you should see if you can see the good faith estimate provided by his mortgage broker so you can shop it with other brokers (or by merely making the suggestion that he should do it himself)

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