Everything you need to know about PMI, or private mortgage insurance
There is a long-standing misconception that a buyer must put 20 percent down when buying a home and obtaining financing. While a 20 percent down payment might be the norm, it’s not necessary. In fact, the average down payment is just 11 percent, according to data collected in 2016 by the National Association of Realtors.
There are financial benefits in getting to 20 percent down. If you’re considering putting less than 20 percent down on your home, then you might need to take on the additional expense of private mortgage insurance, or PMI. Depending on the loan amount and down payment percentage PMI can add a few hundred dollars to a monthly payment.
Contrary to logical assumption, though, an interest rate could be more attractive, by just a smidge, if a borrower puts down less than 20 percent. This is because there is slightly less risk to the loan due to the insurance provided by the private mortgage insurance.
Although there are several ways to buy PMI, there are generally two different options most commonly used:
Borrower paid mortgage insurance – Typically, the payment is made in installments along with the monthly mortgage payment. This would be a good option for a borrower who expects to be in the home 10 years or more. The payments may be tax deducted for those that qualify. The insurance can also be cancelled when the 20 percent threshold of equity is reached. Borrower paid mortgage insurance is also available in single payment options, or split premium which has some upfront and some monthly payments.
Lender paid mortgage insurance - With this option the cost is factored into the interest rate. It is best for a buyer who expects to be in the home less than 10 years. The additional mortgage interest is deductible. A drawback to this option is that it can only be eliminated when a borrower sells the home, pays off the mortgage or refinances. However, this is still a reliable option for our transferee customer base as they tend to move around frequently.
Contact GRARelocation@grarate.com for more information.