Buying a Home with Mortgage Insurance
The conventional wisdom is that you need a 20% down payment to qualify for a mortgage and get your dream home. And if you can save up that amount as a deposit, you will save on interest and other related costs.
However, there are options for home loans that don’t require such a large amount of cash up-front, including:
- Low down payment loans with Private Mortgage Insurance (PMI).
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What is Private Mortgage Insurance?
Private Mortgage Insurance is an extra amount you pay each month in exchange for reduced down payment needs.
PMI is there to protect the lender against the greater risk involved with loans with small or no down payments. Lenders will often require it when your loan to value ratio is above 80%.
You don’t need 20% down.
Mortgage Insurance means you don’t have to come up with 20% for a down payment, so you shouldn’t let that number hold you back; most people put down between 5 and 20%.
For some people, paying the PMI is worth it because it allows them to make a home purchase earlier than they would be able to otherwise.
And unlike an FHA loan, a government sponsored program, Private Mortgage Insurance doesn’t stay on the loan forever. While you can later refinance your loan to remove PMI, that’s only one option to pursue. PMI can be removed a number of ways, including paying your mortgage down over time to below 80% of your sales price and property appreciation over time. You don’t always have to refinance and give up a great low rate just to remove PMI.
What are the advantages of Private Mortgage Insurance?
By adding the Private Mortgage Insurance premium to your monthly mortgage payment, you can buy a home with less than a 20% down payment, leaving you more cash on hand for costs such as moving expenses, repairs, and other needs.
It also means you can buy a home now and start building equity instead of waiting until you’ve saved for a down payment.
Do keep in mind, however, that Private Mortgage Insurance reflects a higher cost per month for your mortgage payments. Be sure to calculate what you can actually afford to pay each month.
While PMI amounts will vary, you can typically expect to pay an extra $30 to $70 per month for every $100,000 you borrow.
Alternatives to Private Mortgage Insurance
You have other options for reducing the need for a large down payment; for instance, a lender (including SF Fire Credit Union) may approve you for a second loan such as a Home Equity Line of Credit that can help you reduce the down payment requirements while keeping your first mortgage loan amount within an 80% loan to value ratio to secure better interest rates.
We’re here to help
After considering these points, you may still have questions about your particular situation. Our Real Estate Loan Officers are here to help you answer questions about your home loan options.