If you are considering buying a home using a conventional mortgage with a low-down payment, you may have heard about the need for private mortgage insurance (PMI). Here’s what you need to know about PMI, when you need it, how to pay for it, and when you can avoid altogether.
PMI is meant to protect lenders. But the benefits of PMI extends to borrowers, too. When lenders are protected from the risk of default, they are more willing to lend to borrowers who don’t have a traditional 20% down payment saved. That means more mortgage loan options and lower down payment options are available for you the homebuyer.
Mortgage insurance typically costs between 0.5% and 1% of the entire loan amount annually. If you have a $200,000 loan at the higher PMI cost of 1%, your annual mortgage insurance premiums could total $2,000 each year. Your mortgage insurance may be tax deductible, depending on your income tax bracket. Please check with your accountant as to whether you can deduct your mortgage insurance.
There are a variety of choices available when paying PMI and each will vary based on your individual financial situation:
If you want to avoid paying for mortgage insurance in the first place, you have options. The first is to make a traditional down payment of 20%. Our Home Buyer’s Gift Advantage program allows borrowers to use gift funds for 100% of their down payment.
Another option for borrowers who want to avoid mortgage insurance is to obtain a second mortgage, known as a “piggyback”, to provide funds for their down payment. Often times these second loans will carry a higher mortgage rate and typically have more stringent credit score requirements. Talk to your loan advisor about whether or not a second loan is the right option for you.
Mortgage insurance will add to the overall cost of your home purchase, whether you pay upfront fees or an additional monthly premium. For borrowers who qualify for a home loan now, and who don’t want to wait to save up a substantial down payment (or take on a second loan), mortgage insurance is often an acceptable “price to pay” to buy a home with a no-down or low-down payment loan.
Ask your mortgage loan advisor about the down payment options available to you, including your options for gift funds, second mortgages, and mortgage insurance if you want to buy a home with less than 20% down.