How To Avoid PMI On A Mortgage
There have big huge changes in our lending environment over the last several months. It is harder to qualify for a home loan, and it is really harder to get a low interest loan. It is also harder to avoid Private Mortgage Insurance (PMI) payments.
This product is actually insurance that will pay your loan company, and not the borrower, in case the loan goes bad. This reduces the risk to the mortgage company, and they often require the borrower to pay for this extra coverage. It is not intended to help the actual home owner in any way. But the borrower may have an extra few hundred dollars added to their mortgage bill each month.
If you have 20% of your purchase price to put down, you usually do not have to take out this coverage. The lender is assured that you already share the burden of home ownership with them, and they have less risk to worry about. So if you buy a $200,000 loan, and you have $40,000 to put down, you should not need to take out this extra policy. The minute you walk into your new home, you already have a share of it. But since policy rates can be one percent of your loan value a year, you may end up paying an extra $2,000 in payments if you need to take out a loan for the entire amount without a decent sized down payment.
There are still ways to avoid or reduce these extra payments even if you cannot come up wth a twenty percent down payment. You really should consider some alternatives because you could certainly put your money to better use. You could pay off your loan earlier, make home improvements, or start an emergency savings fund. These all seem like better options than paying money to protect your lender.
Consider an example of one way to cut out this cost. This consists of getting your lender pay the premium. They may raise your interest rate slightly if they agree to this. It is called Lender Paid PMI (LPPMI).
Take the example of a $150,000 mortgage which is fixed for thirty years at about five point five percent. Your payments should be about $850. You are only paying for the loan balance and interest.
But if you had to pay for PMI, even if your interest was about 5.1%, your payment would be over $100 a month more! This is for the same loan. The only difference is that in one case, you have to pay for the policy. In the other case, the mortgage company will raise your interest rate a little, but pay the PMI.
Remember that this hundred bucks covers your loan company, and it does not cover you. This seems a fair deal to me. Compensate them a little more, but let them pay the premiums!
Paying for the policy with one large premium, right up front, could give you a big discount on rates. This cost could be rolled into the actual loan at closing too. Even though you are borrowing the money you have to pay, it could be cheaper than making monthly payments on it.
A couple of years ago, it was very possible to avoid PMI without making a down payment. People took out an eighty percent loan from one company. They borrowed twenty percent from another lender. This meant they could get into a house without a down payment, and that they could avoid PMI. These are a lot tougher to find these days with tougher lending rules.
I would like to add a word of caution. If you want to buy a home, but cannot put down twenty percent, you should make sure you are ready for this additional responsibility. Could you buy a cheaper home or delay your purchase until you have more money saved.? Sometimes the purchase is still a good idea. It is your decision, but be sure you consider everything before you move ahead.
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