Saving up money for the average 20% down payment could be a real challenge when trying to secure a home loan. Even if you do have some money on hand, you might feel uncomfortable using it since you’d likewise need to pay for all the costs of owning your own house, provided that you get approved for a mortgage.
However, PMI or private mortgage insurance enables you to make a significantly reduced down payment by paying extra insurance payments monthly. If you do go down the PMI path, you could choose between four types:
BPMI or Borrower-Paid Mortgage Insurance
This is the most common type of PMI, and it tacks on additional costs to your mortgage payment each month. This is likewise the most popular PMI option since you could terminate it once you have 22% equity on your house via your home loan payments, explains an experienced mortgage broker from the Altius Mortgage Group in Utah.
LPMI or Lender-Paid Mortgage Insurance
With this PMI type, your lender would pay for your PMI, but add the cost to your mortgage interest rate. With an LPMI however, you won’t be able to cancel it even if you reach 22% home equity, and would need to keep paying for it for some time.
Single Premium: With this option, you could pay the entire PMI rate in one, nonrefundable, lump sum payment, making your monthly home loan payments very low.
This kind of PMI enables you to pay some PMI cost in lump sum during closing. Once you’ve paid off the closing costs and a percentage of the PMI, you could then pay off the remaining PMI balance monthly. This would make your monthly payments lower since you’ve already paid some PMI.
Private mortgage insurance or PMI is an excellent option to lower your down payment, and while you could from four different types listed above, the borrower-paid option remains the most preferable among many individuals since you could walk away with a low down payment. And while there are many things you could do to lower your mortgage payments, PMIs are a good choice to stay on top of your budget. Plus, you could cancel it once your loan-to-value or LTV ratio meets a specific percentage.