FIRST TIME HOMEBUYERS MUST DO THIS

If you’re putting less than 20% down on a new home, then you MUST do this.  Consider a credit improvement service that promises to increase your credit rating.  It seems like a small thing, but it can add up to big savings in the cost of PMI.

PMI Changes Based on Credit Rating

The better your credit rating, the lower the PMI.  Having an “average” rating vs.  a “good” rating can result in a painful increase in PMI each month.  The rate table below is for one of the largest PMI insurers.  Note that the PMI rate for fixed loan > 20 years with a FICO “very good” 750 rating is .59% of the loan amount and a “good’ 690 rating is 1.08%.  Not much of a difference in credit rating, but $980 annual difference on a mortgage of $200,000.  The benefit of an improved credit rating is magnified moving up from “poor” or “average” credit ratings to “good” or better credit ratings.

This is important for a couple of reasons.  Knowing that the credit rating impacts PMI, it is worth the time and attention to work on improving your credit rating in anticipation of purchasing a home.  Second, if your credit rating has improved during the life of the mortgage, it might be possible to lower PMI if the loan is refinanced with the current or different lender who will use a lower PMI factor in the calculation.  Doing some simple things can help improve credit ratings and lower PMI.

Note that non-conventional, government back mortgage programs use a difference insurance model called “MIP” or mortgage insurance premium with difference rules.

Big Changes Around the “Edges”

At loan initiation the borrower should understand the impact of minor changes in the credit rating and LTV ratio ranges.  The PMI factor difference with a 90% LTV versus a 92% LTV ratio (an additional 2% down on a $250,000 home or an additional $5,000 down payment) with a 700 credit rating could change the PMI factor from .87% to .60%.  That means $1,350 or $112.50 each month on PMI (.90% x $250,000 home x .60%) vs. $2,001 or $166.75 each month on a $230,000 (.92 x $250,000 x .87%).  Another $5,000 down could prevent about $50 a month in PMI.

as of November 2017

So Be Smart

Be aware that little improvements to the LTV ratio and credit rating that can have an impact on PMI.  You can manage these factors to lower overall PMI on the mortgage.  Keep up to date on your credit score and know the month to month improvement to the LTV ratio as the loan principal is paid down.

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