PMI Basics: What Home Buyers Should Know About Putting Down Less Than 20 Percent
Typically mortgage lenders require 20% of the home value as a down payment in order to buy a new home. For many buyers, especially first time home owners, this can take considerable time to save. In a perfect world everyone would wait to purchase with this cash in hand, however life factors such as the hot market we are experiencing now, relocations, separations and more can leave buyers looking at alternative mortgage products that may require private mortgage insurance or PMI.
Our team works with buyers at all phases of the home buying process including all financial levels. Our experience helps guide you to making the right decision, at the right time for you! Here’s a few basics on PMI and some pros and cons to help you weigh the decision. In the end, your Realtor and Mortgage Lender are a great team to help you navigate the process so while this information is a guide, each situation is unique so be sure to talk to your Realtor or Lender before getting started.
What is PMI?
When a home buyer needs to make a down payment of less than 20 percent, they may be required to pay private mortgage insurance or PMI. PMI is also often required when there is less than 20 percent of home equity in a home and the owner needs to refinance a mortgage. With rates at unprecedented lows, this might still be beneficial to your overall bottom line!
Why Is PMI Necessary?
Simply put, Private Mortgage Insurance is a form of insurance against defaults or foreclosures. Lenders are assuming a certain level of risk when buyers do not show sufficient investment in a property and such borrowers, historically, are more likely to walk away from a home in times of financial difficulty. As the borrowers do not get any additional benefits from paying PMI other than the ability to have a conventional loan.
Top Things To know About PMI
While PMI can make getting into a home possible without sufficient cash, here’s a few things to know:
- Interest rates, fees and tax deductions with PMI can vary and are often dependant on market variables, your credit score and the lenders requirements
- You will have fewer choices in rates and lenders
- You will be paying a lender more money until sufficient equity builds in your home - Keep in mind PMI payments do not help build equity
The good news is you won’t have to keep PMI for the life of your home loan! Typically when the loan-to-value (LTV) ratio falls to 80 percent you may request that the mortgage insurance premium be cancelled. To determine this, an independent appraisal will be required, an expense that will cost you around $300 to $450. Building this equity can take several years depending on your home value, interest rates and market factors, so be sure you fully understand PMI insurance with your lender or Realtor before proceeding.
Are you a DIYer?Remodeling can add to the market value of your home so you may be able to cancel sooner by making improvements, especially if you can do the work yourself and save in labor costs. Again, this will have to be evaluated by your lender and will require an appraisal.
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Alternatives To PMI
Not sold on the idea of adding PMI to your mortgage? There are plenty of alternatives that do not require a PMI such as:
- A VA loan (if you qualify)
- A combination loan (or piggyback) which involves two mortgages and a lower down payment
- Taking advantage of programs available such as an FHA Loan or Fannie Mae HomeReady Mortgage
- Looking into alternative lenders such as Credit unions and physician loans
- Seeking assistance from family members for financial gifts
Our Team Can Help
Buying a home is one of the largest financial investments you can make and therefore, it’s important to understand all of the options available to you. This makes working with an experienced Realtor who understands the process and has your best interest in mind paramount to ensuring you can feel secure in your decision.