For anyone who is planning to buy a home with less than the standard 20% down payment, chances are good you will be required to purchase PMI or Private Mortgage Insurance. PMI is a relatively new development in the mortgage and insurance industries. It can have a major impact on the final cost of your mortgage and is something you may have no choice but buy.
A Reduced Risk
Lenders see a borrower with less than 20% for a down payment as a higher risk than those who have 20% or more. PMI was created as a way to protect lenders who opted to provide higher risk mortgages to those who lack the cash to obtain a traditional mortgage.
You may have the option to pay for the insurance upfront or add the payment into your monthly payment, which is what most borrowers opt to do. You may also find that your lender will pay for your PMI upfront and then fold the cost into your payments.
Once the amount you have paid on your mortgage along with your initial downpayment reaches 22%, the insurance payments will stop automatically. You also have the option to contact the lender at 20% to have them stop. Bear in mind that if you have an FHA loan, these lenders require insurance that you must keep in place for the duration of your loan.
Is PMI Expensive?
The cost of your private mortgage insurance will vary based on a number offactors, including:
Down payment – since PMI is only required for those who have less than 20%, the more you can put down the better. The system works in tiers designed to help reduce the cost of your insurance.
Your credit score – like many things you buy, the rates you are charged will be based in part on your current credit score. At 760 or higher, your rates will be at their lowest and go up for every 20-point drop in your credit score.
Your debt-to-income ratio – your debt-to-income is a comparison of your income to your expenses. At 45% or lower you get the best rates, anything above and your costs go up significantly.
How the property is to be used – if the home you are buying is to be your primary residence you get much better rates than you would for buying one that you planned to rent or use as a second home.
How many people are listed on the loan – banks tend to feel a lot safer when they know more than one person can be held responsible for the loan. Because of this, PMI rates are also typically lower.
Is PMI Worth Buying?
The big question is, do you spend the money for PMI instead of waiting until you have the 20% or wait until you do? If you are currently renting a home, it could be the only way to get out of the endless rent payment syndrome. By the time you have saved up enough to pay the 20%, you have spent more than the cost of the PMI. If you do decide to go with a PMI covered loan, be sure you look at all options before you make your final choice.