PMI Changes At Closing

Added August 26, 2005 by Ilyce R. Glink

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Summary: A home buyer received a good faith estimate including an estimated amount for the private mortgage insurance. At the closing, the PMI amount was different. By choosing a different type of loan or increasing your loan amount, they could have affected the amount of the monthly PMI payment. However, the home buyer could have avoided PMI all together with an 80/10/10 loan.

Q: When buying a new home, my lender gave me a good faith estimate of the closing costs which included the private mortgage insurance payment.

The PMI payment was quoted at about $86.00 per month. At closing the PMI was $109. Are there any regulations that a lender must at least come close to their estimate. If he had been that far off with every line on the fair estimate my monthly mortgage payment would have doubled.

A: I can't understand why the estimate for your private monthly insurance changed, but one reason could be that you decided to borrow more money from the lender.

By choosing a different type of loan or increasing your loan amount, you could have affected the amount of your monthly PMI payment. On the other hand, you could have avoided PMI altogether. There is a loan product called an "80/10/10" (pronounced "eighty-ten-ten") and its counterpart, the "80/15/5".

These loans offer an 80 percent first mortgage which eliminates the need for private mortgage insurance. Then, you'd get a 10 percent or 15 percent second mortgage, and put down 5 or 10 percent in cash on the property.

The private mortgage industry is up in arms about the 80/10/10 loans, because so many people have realized it's often a smarter move to get a loan and home equity loan to pay for a home purchase than to pay private mortgage insurance.

Why? with a home equity loan instead of private mortgage insurance, you're able to deduct the interest you pay from your federal tax return. (PMI is an insurance product which is not deductible, although the private mortgage insurance industry is spending a lot of money on Capitol Hill to push through legislation that would change that.)

Also, the interest on the home equity loan tends to be less expensive than paying private mortgage insurance because interest rates in general have been so low.

In your case, when you got to the closing and noticed the difference from the good faith estimate, you could've held the lender's feet to the fire. The Federal government doesn't take too kindly to lenders who make last-minute changes to the Good Faith Estimate that cost consumers 25 percent more. If there had been a mistake on the lender's part, you may have been able to negotiate some sort of a settlement at the closing.

I don't know if you used an attorney, but this exactly what a good real estate attorney could have done for you. If you have a complaint against the lender, you can file it with the agency that regulates mortgage lenders in the state in which you are located and with the Department of Housing and Urban Development.

If you want to get rid of PMI, your best option will be to refinance your loan.

Published: Aug 26, 2005

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