Recently, a client of mine who is looking to buy a 2-4 unit investment property asked a common question regarding financing. He asked, “Does PMI differ from bank to bank?” If you are unfamiliar with PMI, it is an acronym for “private mortgage insurance”. Investopedia defines private mortgage insurance as: a risk-management product that protects lenders against loss if a borrower defaults.
Generally speaking, if you put down less than 20% as a down payment on a home, you can expect to pay a monthly PMI to your lender. Private mortgage insurance protects the lender against your potential default on the loan. If you make a minimal initial investment – that is to say, down payment – the bank essentially shares the risk with you.
For example, if you were purchasing a $400,000 property with 10% down and using conventional financing, your total estimated monthly payment may look something like this:
|Principal and Interest||$1,770.98|
|Real Estate Taxes||$416.67|
|Private Mortgage Insurance||$186.00|
|Total Monthly Payment||$2,490.32|
These numbers were taken from a title company app that helps buyers estimate their monthly payments and closing costs prior to talking to a loan officer. Consult your loan officer for numbers based on your financial situation. However, the above breakdown of monthly expenses can help you generally understand the various monthly expenses, which include PMI.
Does PMI differ from bank to bank? Yes!
So going back to the original question, the answer is “yes”. The price and terms surrounding PMI vary by bank, so be sure to ask your loan officer for the specifics when you get pre-approved, so that you don’t commit to a loan you don’t fully understand. PMI costs have increased since the mortgage market collapse of 2008.
Your takeaway from this blog post should be to compare lenders when getting pre-approved for a mortgage. I always recommend this to my clients looking to purchase an existing home. Costs vary depending on which bank you end up using for your loan, so it can prove invaluable to shop around. There are always exceptions to the rule however…
The exception to this rule of shopping around is if you are getting a loan for a very specific purpose, such as a construction loan to build a prefab home. Construction financing is a niche market and you really want to work with a bank that understands the whole process.