You found the perfect home but you don’t have 20% to put down for a deposit. Are you out of luck?
Not necessarily. People buy homes every day without a 20% deposit, but they may need to take a few extra steps to make their dream a reality. Purchasing Private Mortgage Insurance (PMI) is one of them.
So what is PMI exactly? You’ve probably heard the term thrown around the water cooler of friends and co-workers embarking on their home ownership journey, but do you know what it is or if you need it?
Here are the basics:
- PMI is insurance on a conventional loan that is usually applied when the borrower has less than a 20% down payment on the purchase price of their home.
- PMI protects the lender (not the buyer) in the event that the buyer is no longer able to afford their mortgage payments and forecloses on their home.
- PMI is usually added to the buyer’s monthly mortgage payment, but other arrangements can be made. Some buyers prefer to pay the PMI up front so that their mortgage payment is lower. Others will pay for some of the PMI up front, and add the rest to their monthly mortgage payment. You can ask your lender what options are available.
- When the buyer has reached an 80% loan to value (LTV) ratio on their home, the PMI is no longer needed.
- Typical PMI ranges from 0.5% – 2.25% of your loan balance per year.
The biggest advantage to PMI is that an individual may have the opportunity to become a homeowner sooner, because a 20% down payment is not required. On the flip side, they pay for that advantage with the PMI fee. Individuals should evaluate for themselves whether the cost of PMI outweighs the cost of waiting to purchase a home.
Will the extra PMI fee be on your mortgage bill forever? Nope! The PMI fee will drop off of the buyers monthly mortgage bill once they have reached an 80% loan to value ratio on their home, up to 11 years. To reach the 80% LTV sooner, a buyer can try refinancing or making additional payments toward their principal.
Several different PMI types and programs are available for potential homeowners to explore. We encourage you to contact your local Franklin Savings Bank lender to talk about how we can reach your goals for home ownership.
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