The days of needing 20% down to buy a home are long gone. To compensate, lenders charge private mortgage insurance as means to offset risk, driving up would-be borrowers’ mortgage payments. Here’s how you can buy a home with less than 20% down and still avoid dreaded PMI…
Quick PMI Nuts And Bolts
Private mortgage insurance (PMI) is an extra fee your mortgage lender will normally require you to pay each month when you buy a home without 20% down. The factor is typically based on approximately.5 percent of the loan amount on an annualized basis, but other factors change this amount. The main driver of mortgage insurance cost is your credit score. The higher the score, the lower the percentage of mortgage insurance associated with your mortgage payment when opting a conventional loan program (meaning non FHA/VA Loans) . The cost of mortgage insurance also changes by the amount of your down payment. For example a 10% down will cost more in mortgage insurance than a 15% down loan. More skin in the game equals lower cost.
Shift The Burden Of PMI To The Mortgage Company
The mortgage insurance can be paid by the lender instead. The catch? A slightly higher interest rate than a current market rate under a lending program not seen since 2007, called Lender Paid Mortgage Insurance (LPMI). That’s right you heard it correctly the lender pays the PMI associated with the mortgage that you otherwise incur each month. The amount of monthly mortgage insurance can equate to several hundred dollars per month on top of your mortgage payment comprised of principle and interest, taxes and insurance. For example take a loan at $417,000, let’s say the annual mortgage insurance associated with this loan amount at 90% financing is $2,502 per year based on .06% of the loan amount given your perspective credit score. This represents $208.50 per month in addition to your house payment.
How the lender paid private mortgage insurance fits into the mix…
Using our $417,000 example let’s say the 30 year fixed rate with PMI is 4.375% that new mortgage payment before accounting for taxes or insurance is $2,290 per month ($2,082 + 208.50 above). Alternatively, taking the loan with a slightly higher interest rate at 4.625% ,the mortgage payment drops to $2143 respectively, earmarking a $146.03 per month payment reduction. In this financing example the payment is lower while the interest rate is higher, resulting in a total lower monthly mortgage payment improving borrowing power subsequently, lowering the payment to income ratio, a key measure lenders use in determining how much house you can afford.
In order to qualify for Lender Paid PMI, expect lenders to want the following:
- Buying a primary home
- at least a 700 credit score
- a 10% down payment
- a payment to income ratio to not exceed 45%
What You Need To Know About Buying A Home With Mortgage Insurance
Mortgage insurance is no longer deductible on a primary residence. Additionally, removing PMI without refinancing is not for a the faint of heart. First, you’ll need to have had the PMI on your loan for the last 24 months and have accumulated 20% equity just to be eligible. Assuming you’ve met those thresholds, it is a petition with your lender/servicer to drop the mortgage insurance, it is by no means a guarantee. Make no mistake, your lender whom you’re making your mortgage payment to is not incentivized to contact you, to drop the monthly premium you’re paying that only enriches their balance sheet. The onus is you, the consumer .
Refinancing is always an option to drop mortgage insurance as well. In many cases, the ability to recuperate the fees associated with refinancing very well could be less than the total 24 month cost of the mortgage insurance, not to mention, without needing the 20% home equity under Lender Paid PMI.
If you have the cash for 10% down, Lender Paid Mortgage Insurance may be a favorable loan choice. It more than likely will provide a lower monthly mortgage payment with a larger buying power all while possibly avoiding future hoop jumping with your lender in two years or having to refinance.
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