When it comes to purchasing property, there are many things to consider. Besides choosing a loan, you’ll need to navigate the various types of insurance available to get you through escrow. Depending on the size of your down payment, you may also need to consider a PMI tacked on to your mortgage payment.
PMI stands for private mortgage insurance. But why on Earth would you need insurance before you buy a home?
The smaller your down payment is, the more money the lenders need to protect themselves. Lenders require PMI to protect themselves in the event that you can't make your mortgage payment.
PMI is not so much for your security, as it is for the lender's.
Private Mortgage Insurance Cost
Now that we know what PMI is and that the lender requires it during the buying process, let's talk about how much it costs.
Avoiding PMI can be challenging for many home buyers because depending on the purchase price of the home, a 20% down payment can be steep. If you are able to afford 20 % down, then the PMI won’t get tacked on to your monthly mortgage every month.
Here’s an example:
You buy a home with only 10% of the home down payment on a loan amount of $250,000. In this scenario, the mortgage rate plus your PMI would make the interest rate 4.625%. The interest payment and mortgage come out to a total of $1,379 per month.
Types of Loans
That hypothetical example is a very common outcome for mortgages, but there are other available options to avoid PMI, if you qualify.
As a military veteran, you are eligible to utilize your VA home loan, which never requires PMI, regardless of your down payment amount.
If you’re not a veteran but you are already a homeowner there is good news for you... as long as you’re not scared of a piggyback ride. A piggyback mortgage is when the home buyer opts for purchasing a home through a second mortgage to cover the down payment. This option eliminates PMI and keeps your monthly mortgage payment low.
Piggyback financing requires an 80% first mortgage, a 10% second mortgage, and a 10% down payment. You use 10% down payment for closing. Second mortgages may not be your lender's forte but a bank or credit union might just give you the help you’re looking for.
Moving right along into the next three letter acronym: the FHA loan (Federal Housing Administration loan). An FHA loan, a loan for first-time homebuyers, may be a good option as interest rates are still relatively low. They boast lower down payment costs and accommodations for those looking to buy their first home. You can use this type of loan to buy or renovate a residential property.
What does the FHA loan have to do with private mortgage insurance?
PMI is going to reassure the lender that their investment is safe from default in the event that you don’t pay your mortgage. Because lenders only require 3.5% for a down payment, they are more at risk with first-time homebuyers than those who can afford to put down 10% or 20% on their house.
Those who use FHA mortgages have two options: a five-year adjustable rate loan, or a fixed term loan ranging from 15 to 30 years. If you expect your income to increase in the next 5 to 10 years, you may be able to take advantage of the graduated payment loan option. Talk to a lender to see if this an option for you.
Accessibility with your FHA loan includes buying a mobile home, manufactured home, and borrowing against equity. It is also a great option for senior citizens who need help with a home loan. There is one caveat; with the FHA loan, your interest rate may be higher than that of a conventional loan.
The FHA needs two forms of insurance and an upfront payment and annual premium. The upfront rate is 1.75% and depending on the loan type and amount the annual mortgage premium would be .8% and 1.05% on loans 15 years or longer. Those rates would change to .45% and 95% if the loan is only 15 years long.
The last step in avoiding PMI utilizing an LPMI which is yet another acronym, it stands for Lender Paid Mortgage Insurance. The lowdown on LPMIs is that if you don’t have the 20% down payment the lender can create a PMI just for you. BUT the LPMI is going to need 3% down and comes at the price of a higher interest rate on your loan balance. In reality, you’re still paying for a PMI but it has an L in front of it.
PMI: Not All Bad
PMI doesn’t have to be a terrible monster. It exists as a way for people who do not have enough money to put a down payment of at least 20% of the total cost of the property they wish to purchase. A PMI allows a person with less cash up front to buy property. As for the economic trend, many people who are within the average house buying demographic are unable to afford a 20% down payment. But with a PMI, it allows for more people to enter the property buying market which is good for the individual and the real estate economy as a whole.
How much can you actually save every month using an LPMI?
Here’s another breakdown example.
A $250,000 piece of real estate with 10% down and 5% interest rate would give you LPMI payment of $1,342. You would save about $40 a month. One caveat, though: you can never cancel an LPMI plan even when you pay off up to 80% of the loan balance. This differs from a regular PMI because when the homeowner pays off 7 % of the loan PMI drops off. Deciding if you need PMI is contingent on your to financial status. The right option will vary person to person but always do what makes the most financial sense for you.
Something important to consider when deciding if a PMI is for you, is that it is tax deductible, kind of. If you itemize your taxes, you may able to take advantage of the interest you pay throughout a tax year. PMI itself isn’t tax deductible, but the interest that you pay on it is. You need to know all the stipulations for deducting PMI from your taxes. This is something any tax officer or lawyer could assist you with.
Bank Options When Looking For No PMI
Bank of America offers the Affordable Loan Solution mortgage. It requires 3% down and doesn’t need a PMI. Flagstar bank offers the Professional Loan but that is for people with high earning careers because the loans are for large ticket items of real estate. But these are a couple of options worth exploring when you’re looking for a loan that fits your need.
Need a real estate agent to help you find a house that won't require PMI? Talk to a Clever Partner Agent today. Call us today at 1-833-2-CLEVER or fill out our online form to get started.