Private mortgage insurance (PMI) is required when homebuyers put down less than 20 percent of the purchase price. It is insurance for the lender, not the buyer. PMI is designed to help them recover costs if buyers default and the bank has to foreclose on the house at a loss.
Don’t confuse PMI with homeowners insurance, which is also required by lenders. Homeowner’s insurance covers damage or destruction. PMI has no benefits for buyers – except allowing them to buy a house while putting less money down.
You may not be required to pay PMI monthly if you have a USDA or Veterans Affairs loan. Keep in mind that these loans come with a funding fee that can be as low as 2.15 percent or as high as 3.3 percent. The amount depends upon your qualifications. FHA loans typically have a 1.75 funding fee as well as PMI costs.
For most loans, PMI costs fall between .25 percent and 2 percent of your balance per year. The more you borrow, the more you’ll pay.
To avoid monthly PMI, look into paying a lump sum single premium up front for the PMI. You can forgo PMI altogether by taking out an 80/10/10 loan. In this type of loan, you borrow 80% on a first mortgage, 10% on a second and put 10% down. An 80/15/5 loan works better for buyers with smaller down payments. These options are typically only available through lenders that offer first and second lien positions, so be sure to ask your lender if this is something they can provide.
To figure out the best option for your home buy, rely on your lender. He or she will help you figure out how to “break even” with PMI and still have a workable monthly payment. Most lenders will come to the table with multiple options.
If you end up paying PMI, keep an eye on your statements. Typically, once you’ve paid off 20 percent of your mortgage, you can request to have your PMI canceled.
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The blog and its opinions are expressly that of its author and does not convey the opinions or strategies of the Credit Union and should not be considered financial advice. CommunityAmerica’s Mortgage offers are subject to credit approval and terms may vary based on conditions.