As you have probably noticed, the mortgage market is very different than it was a couple of years ago. You may find that it is much tougher to get a loan, and it is really tougher to find a lower interest loan. PMI, or private mortgage insurance, is also tougher to avoid.
Private Mortgage Insurance, or PMI, is a type of policy that your lender may require you to buy before they will issue you a loan. It actually covers the loan company in case you cannot make payments. It does not cover you. You will still be responsible, and your credit can still be damaged. The reason lenders like it, is that it reduces their risk of losing money when they decide to carry your loan. But you usually have to pay for it, and it can add a few hundred dollars to your loan payment each month.
The most obvious way to avoid paying private mortgage insurance (PMI) is to have that twenty percent down payment. That way you will walk into your home with substantial equity. Your loan company will be satisfied because your loan will not be as risky. If you purchase a $100,000 home, and you put down $20,000, you should not be required to take out this coverage. You already will have some home equity. If things do go south on your loan, a lender is much more likely to be able to recover their share. Most of the time, they like to put the burden of paying for this on you.
But if you do not have the down payment, you still may be able to avoid increased monthly payments, or at least save some money on it. I think this is important to consider, because you could be making a large extra payment that does not help pay off your loan. It really does not give you any value at all besides helping to get you qualified for a loan on a home you want to own.
Let us look at what happens to your mortgage payment if you can avoid paying for this insurance that is put in place to protect your mortgage company, and not you. One way is called Lender Paid PMI. In return for a small adjustment to your mortgage rate, you can get the mortgage company to purchase the policy.
Take the example of a $150,000 mortgage which is fixed for thirty years at about five point five percent. Your payments should be about $850. You are only paying for the loan balance and interest.
But if you had to pay for PMI, even if your interest was about 5.1%, your payment would be over $100 a month more! This is for the same loan. The only difference is that in one case, you have to pay for the policy. In the other case, the mortgage company will raise your interest rate a little, but pay the PMI.
Remember that this hundred bucks covers your loan company, and it does not cover you. This seems a fair deal to me. Compensate them a little more, but let them pay the premiums!
Not all lenders will make this deal for all borrowers though. Another option is to look into single premium policies. Since they are paid with one upfront payment, you can usually get a discount. You may also be able to roll this amount into your loan, which could still cost less than actually paying the higher price for monthly premiums.
We used to hear a lot about 80/20 loans. These existed to help borrowers get into a home with 0 down payment, but also to avoid PMI. Since the first lender is only lending 80%, they were satisfied that the risk was lower. A year or two ago, these were very common. But with tougher lending rules now, they are hard to qualify for.
I would like to add a word of caution. If you want to buy a home, but cannot put down twenty percent, you should make sure you are ready for this additional responsibility. Could you buy a cheaper home or delay your purchase until you have more money saved.? Sometimes the purchase is still a good idea. It is your decision, but be sure you consider everything before you move ahead.
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