Private Mortgage Insurance (PMI) is one of the most important elements of purchasing a home and closing on your loan.
To recap, mortgage insurance is usually paid by borrowers who are making a down payment of less than 20% of the purchase price of the home. It is also usually required on FHA and USDA loans and lowers the risk to the lender who is loaning you the money. It is also necessary to qualify for the loan in the first place.
On average, you will pay between $40 and $80 per month for every $100,000 borrowed. This varies based on your credit score and loan-to-value ratio. The loan-to-value ratio is the amount you borrowed on your mortgage compared to the home value.
For traditional loans, there are 4 ways you can handle mortgage insurance.
1. Monthly Mortgage Insurance: The first way, and most popular way, is monthly mortgage insurance. This is when the mortgage insurance premium is being paid as part of your monthly mortgage insurance. It can be removed over time, once you reach a certain equity threshold in as little as 2 years.
The drawback of monthly mortgage is that you’ll likely end up paying more over time.
2. Single Paid Mortgage Insurance: The second option is called a single paid mortgage insurance. This is a one time charge, paid at closing, and once it’s paid it’s done and you never deal with it again. It also doesn’t affect your payment schedule. The benefit of this option is that your monthly mortgage payment will usually be lower than if you go with the first option. You do, however, run a risk if you choose to refinance or sell within a few years, the single premium is not refundable. Also, if you do not have enough money to afford the 20% down payment, the chances are low that you will be able to afford paying a single premium upfront.
3. Lender Paid Mortgage Insurance: The third option is called lender paid mortgage insurance. That’s when the lender will pay the mortgage insurance on your behalf and you are paying for it by having a slightly higher interest rate. This usually results in you having to pay less, in comparison to the monthly plan, but you will be paying a higher interest rate throughout the life of the loan.
4. Financed Mortgage Insurance: The final option is financed mortgage insurance. This is a single pay mortgage insurance premium. However, instead of paying it through the rate, or paying it out of pocket, you are financing it back through the loan amount. Just like with the higher interest rate, you do pay on that over the life of the loan.
Different down payments and credit scores will determine typically which strategy will serve you best. But as an experienced lender, that’s what I’m here to do. Based on your short and long term goals, I will help you determine what strategy best suits you.
Ready to close on your goal home? To find the best loan solution for your goals, you can get in contact with me by emailing (rebecca.richardson@wyndhamcapital.com) or finding me on Instagram (@the.mortgage.mentor).