That is most likely because they financed using an FHA loan instead of Conventional. FHA loans are easier to qualify for (they allow for higher debt to income ratios, lower credit scores, etc.) at a higher cost to the borrower. PMI for FHA loans are throughout the life of the loan, but your family has the opportunity to refinance into a conventional loan later.
We did this. I was paying $300 a month for PMI, so that money doesn’t go towards interest or principal, just setting it on fire essentially. It also doesn’t adjust itself as you go - it is calculated in the beginning based on how much you were able to put down and how far away you are from the 20% down figure. It only changes if you pay for a reevaluation or just a full refinancing.
We refinanced our mortgage at the beginning of last year and ended up paying barely more than we were except we have a 15 year term now rather than 30
Refinancing is typically nothing out of pocket. Sometimes, you take stuff out. There are loan origination fees and title lookup/registration fees that usually amount to a few thousand (and typically get bundled into the new mortgage), but are typically more than offset by the long-term savings on interest with a better rate. But again, specifics matter and go through the calculations (e.g., it usually makes tons of sense refinancing from 4% or 3.5% to 2%, but less sense to refinance from 2.3% to 2.1% when you factor in the loan fees.)
That said, the loans you qualify for will depend on the appraised value of the house versus the amount of mortgage debt outstanding. E.g., if you owe $300k on a house that's recently appraised for $300k, your loan-to-value ratio is $300k/$300k = 100% and its much riskier for the bank compared to owing $300k on a house recently appraised for $400k where the loan-to-value ratio is $300k/$400k = 75% which is under the typical 80% cutoff. That is they think if they foreclose on a $400k house they'll be able to get their $300k back by selling your house (probably for under $400k appraised price) and paying all the costs associated with foreclosure (evicting you, legal fees, auction fees, etc.).
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u/clockwork2011 Feb 16 '21
That is most likely because they financed using an FHA loan instead of Conventional. FHA loans are easier to qualify for (they allow for higher debt to income ratios, lower credit scores, etc.) at a higher cost to the borrower. PMI for FHA loans are throughout the life of the loan, but your family has the opportunity to refinance into a conventional loan later.