Avoiding PMI with Only a 5% or 10% Down Payment
When calculating their potential monthly mortgage payment, many home buyers forget to include the cost of private mortgage insurance, or PMI. If you're not familiar with PMI, it is insurance that some buyers must purchase to qualify for a home loan. However, the purpose of PMI is to protect a lender in the event that the homeowner fails to pay their mortgage. In other words, homeowners are paying for insurance that protects lenders, not homeowners.
There is good news, though! There are options for buyers to avoid paying PMI with a down payment less than 20 percent. PMI is available in other forms that can make monthly house payments lower and save homeowners money over the life of the loan:
- Lender paid mortgage insurance (LPMI): The buyer accepts a slightly higher interest rate in lieu of paying monthly mortgage insurance. With rates so low, the monthly benefit is immediate and the LPMI option can help homeowners start saving money as soon as they buy.
- Home Equity Line of Credit (HELOC): Avoid mortgage insurance completely by going with a simultaneous closing, or “piggyback” loan, which is typically seen as an 80-10-10 home loan. The “80” is the percentage of the first loan, the “10” is the second loan, and the final “10” is the down payment.1
- “Single Premium” mortgage insurance: This is a one-time lump sum that can be paid at closing by the seller and, under the right circumstances, financed into the loan.
Tip: Homeowners who are required to pay for private mortgage insurance may qualify for a tax deduction. The specifics of this issue are different for every household, so check with your local tax advisor to discuss tax advantages for which you may qualify.
The fact of the matter is there are different ways to obtain home financing with a down payment less than 20 percent. Structured properly, avoiding PMI may save homeowners thousands of dollars over the life of the loan. For many people, the standard monthly mortgage insurance is their best option, but how do you know until you see a detailed, side-by-side comparison of all your loan options?
1. Available for primary residence as a simultaneous closing only. Annual maintenance fee of $75.00 applies. Product not available in North Carolina or West Virginia.
All first mortgage products are provided by Prosperity Home Mortgage, LLC dba FM Lending Services. (877) 275-1762. Prosperity Home Mortgage, LLC products may not be available in all areas. Not all borrowers will qualify. Licensed by the NJ Department of Banking and Insurance. Also licensed in Delaware, District of Columbia, Maryland, North Carolina, Pennsylvania, South Carolina, Virginia, and West Virginia.
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