If you are one First time buyer You have surely put pencil on paper to estimate what your future mortgage payments, taxes, insurance, and home maintenance will be. However, before you finalize your list of new homeowner expenses, one of the most overlooked costs to add is private mortgage insurance (PMI). But what is PMI and how does it work?
What is PMI
If you apply for a mortgageYour lender may ask if you want to pay 20% of the home sales price as a down payment. Depending on your local Real estate marketThis can be a significant amount that not every buyer can afford. If a 20% down payment is too big to swing, your lender may look for other loan products that work with a smaller down payment.
However, if your down payment is less than 20%, then it is most likely that private mortgage insurance (PMI) will come into play. PMI is insurance you have paid for that protects the lender in the event that you default on your mortgage payments. The PMI costs between 0.5% and 1% of your annual mortgage and is added to your monthly payment. The money you put in PMI does not go against your home loan and is considered an additional cost.
What PMI is not
While you are paying for PMI, it doesn’t protect you as a homeowner. It is a standard requirement to mitigate the additional risk a lender takes when extending a loan with a smaller down payment.
Do you have to pay PMI?
If your down payment is less than 20%, the PMI is non-negotiable for most loan types. The good news is that once you’ve paid back 20% of the principal of the loan – that’s the equivalent of that 20% down payment, you can stop this payment. At this point, you can ask the lender to remove the PMI from your mortgage payments.
How to calculate the PMI
The size of your deposit is the most important factor in determining the PMI you will pay. As you would expect, if your down payment is less, your PMI payment will be higher.
If you’ve built a strong credit history that shows you are responsibly paying your bills on time, you can qualify for a lower PMI premium. Your loan type can also affect PMI requirements. For example, a fixed rate mortgage is less risky than a variable rate mortgage and usually has a lower PMI premium.
If your PMI comes in at 1% interest rate, then for a $ 300,000 mortgage, calculate:
$ 300,000 x 1% = $ 3,000 per year
$ 3,000 ÷ 12 monthly payments = $ 250 per month
This amount that you pay in PMI is added to your regular monthly mortgage payment.
How to Avoid Paying PMI
The first (and easiest) way to avoid paying PMI is by paying a minimum of 20% deposit. If that’s not an option, see if one of these six strategies is right for you:
1) Look for a Lender Who Doesn’t Need a PMI
Some credit unions or financial institutions may not insist on PMI for individual applicants. For example, they can waive the PMI requirement if the borrower transfers all savings and checking accounts to the lender’s institution. A lender can also waive PMI if the borrower has an excellent credit profile.
Other lenders offer portfolio loans – a direct private loan that is made in-house rather than sold to a third party lender such as Fannie Mae or Freddie Mac. The terms for this type of loan can include smaller down payments (10-15%) with no PMI requirement.
2) Piggyback the loan
In this scenario, you would take out a separate small loan for the 20% down payment and move on to a traditional mortgage. The disadvantage is that the smaller loan usually has a higher interest rate than the mortgage loan. On the top you can deduct the interest on your tax return.
3) Apply for the low cost loan solution
This Loan partnership between Self-Help Ventures Fund and Freddie Mac provides credit to low to middle income homebuyers and allows a 3% down payment with no PMI.
4) Pursue a VA loan when you qualify
Qualified veterans can fund 100% of their home purchase with no PMI requirement. It should be noted, however, that additional upfront fees may apply.
5) If you are a doctor, you may qualify for a specific doctor loan
Some lenders offer specific loans to doctors with new practices and without extensive work experience. These borrowers often have high student debts that skew their debt to income ratio. These loans do not require a PMI, even if the deposit is less than 20%.
6) Check out first-time home buying programs in your area
Take advantage of First time buyer programs These vary by state, territory, county, and city. These programs provide first-time buyers with down payment assistance and closing costs, which in turn can help them avoid paying PMI.
It pays to shop at various lenders and home buying programs that suit your financial situation and hopefully don’t require you to pay for PMI.