Doctor mortgage loans provide many advantages, and not requiring PMI might be one of the biggest ways you can save money. Many people think of PMI (private mortgage insurance) as a necessary part of any mortgage loan if the buyer has less than 20% equity in the home. For those new to the home buying process, that means if you put less than 20% down on a house, you’ll pay a monthly premium for PMI. This additional cost for mortgage insurance protects the lender’s investment if you fall behind on your monthly payments and default on the loan. Here’s an excerpt from MGIC, a mortgage insurer.
PMI…is a financial guaranty that reduces the loss to the lender or investor in the event the borrowers do not repay their mortgage.By using MI to reduce risk, the quality of the mortgage as an asset is enhanced. – MGIC
If you don’t pay your mortgage note and default on your conventional mortgage, the mortgage insurance company is responsible for a portion of the loan amount.
In sum, PMI is designed to protect the lender, not you. It’s an additional monthly cost for you. If you’re paying PMI, you’re not paying down your balance.
How much can PMI cost me?
PMI rates vary pretty widely, but most banks charge anywhere between .3% and 1% of the original loan amount. On a $400,000 home with 5% down, you might be paying anywhere from $95.00 to $316.00 per month on insurance. If you paid 1% with a particular lender, wouldn’t you rather save $316.00 per month? Over 5 years that would be over $18,960.00.
Here’s where doctor mortgage loans come in.
Sometime in the mid-2000’s, bank analysts ran detailed reports on thousands of mortgages held by doctors and determined that default rates were extremely low.
Banks don’t do things that are risky or have the potential to create losses. As a physician, you are considered one of the most stable, credit-worthy professionals, so in general banks want to engage and keep you as a long-term customer.
Thus, the no PMI doctor loans were born.
Not having to pay PMI on a doctor loan means you can put more of your money towards a home and paying down your loan balance, not towards reducing risk for a bank.
I’ve included this video for our visually inclined readers:
For more information about doctor mortgage loans, read our Epic Guide to Physician Loans.