Did you know when you buy a house, there are several costs associated with a home purchase that you may not have planned for and be an expense you can eliminate? A lender requires mortgage insurance when they put a down payment of less than 20% of the home value. For example, on a $300,000 home, if your down payment is less than $60,000 ($300,000 x 20%), you will need to get mortgage insurance. If you can meet or exceed the 20% down payment, you can save a ton of money.
The lender requires mortgage insurance because of the additional risk of lending you more money than 20% of the home value. The insurance would protect the lender if the homeowner were to default on their payments. What are the costs, length of payment, and most importantly, different types of mortgage insurance?
The most common type of mortgage insurance is private mortgage insurance (PMI). PMI can range from 0.4% – 2.25% of the loan amount. For example, if you have a loan for $400,000, then PMI can range from $1,600 to $9,000. So, what determines whether you get a low PMI rate or a higher one:
1. Loan Amount – The larger the loan amount requires a higher PMI rate because of the additional risk to the lender. Therefore, a $700,000 mortgage will have a higher PMI than a $300,000 mortgage.
2. Down Payment – Lenders prefer a higher down payment as it shows that the borrower has funds available to increase their homeownership. A higher down payment will result in a lower PMI rate.
3. Credit Score – Your credit score is fundamental in all lending decisions; a higher credit score shows the lender that you are more credit-worthy and are more likely to pay back your debts.
4. Mortgage Type – PMI rate is higher for adjustable-rate mortgages than fixed-rate mortgages because of the uncertainty regarding the size of the monthly mortgage payment.
When you attain 20% homeownership equity, you can cancel PMI. Hence, insurance does not stay for the life of the loan. It can be removed on average in 6 years, based on the size of the initial down payment.
There are four different types of mortgage insurance:
1. Borrower-Paid Mortgage Insurance (BPMI) – BPMI is the most common type of insurance. In this form of insurance, the premium is added to your monthly mortgage payment, resulting in a higher mortgage payment each month. Once you reach 20% homeownership, you can reach out to the lender and cancel it. You can also get rid of PMI if you refinance and have a smaller loan amount.
2. Single-Premium Mortgage Insurance (SPMI) – with single-premium insurance, rather than increasing your monthly mortgage payment, you pay the insurance upfront in a lump-sum amount. A good strategy if you want smaller monthly mortgage payments. However, these funds can also go towards increasing your down payment.
3. Lender-Paid Mortgage Insurance (LPMI) –this form of insuranc sounds great – the lender pays for insurance – however, it results in a higher mortgage rate.
4. Split-Premium Mortgage Insurance – this type of insurance is a combination of BPMI and SPMI. Instead of adding the entire amount to your monthly mortgage payment, you pay some of it upfront, and the rest added to your mortgage payment. This way, you do not need a substantial upfront payment, and your mortgage is manageable.
As investors, we are in business to make a modest profit on any deal. However, we can help homeowners out of just about any situation, no matter what! There are no fees, upfront costs, commissions, or anything else. We offer the simple truth about your home and how we can help you sell it fast.
Give us a ring. We would love to help you understand the process and to answer all of your questions. You can reach us at 402 999.0577.