Hello from all of us here at the Mortgage Company! We hope you are having a terrific Tuesday, and are staying away from the cold. Today we are going to be looking into something that is a part of most mortgages: Private Mortgage Insurance, or PMI. Knowing about PMI and how to plan for it, or avoiding it altogether, will help you during your mortgage. So what is PMI?
Basically, Private Mortgage Insurance is a way for lenders to protect themselves from losing money. When you first get a loan, one of the first things you do is make a down payment. Depending on the loan, property, and reason for buying, this payment can vary. These can be anywhere from at least ~3% to 10%, 15%, 20% etc. To avoid PMI completely, you will need to make a down payment of at least 20%. This is because PMI allows one to get a mortgage that one may not be qualified for originally. Lenders feel more comfortable when 20% is put down because this shows you will be able to pay off the mortgage with minimal risk of foreclosure. PMI protects lenders from losing money if there is a risk of foreclosure. So how does this affect you?
If you do not make the 20% down payment, you will need some form of PMI. There are a few types:
Borrower-paid PMI (BPMI): This is where your insurance payments are on a monthly basis, usually built into your mortgage payments. This occurs until you have made up around 78% of the original value of your home in monthly on time payments. After this, you can ask your lender for approval to cancel your PMI. Your home must also reach 20% of the purchase price, and have good equity.
Single-premium PMI: This option is where one pays the entire premium upfront. This means your monthly payments won’t increase, and you can pay in full at closing. Or, you can finance the cost into the loan itself.
Lender-paid PMI (LPM): This option is similar to the BPMI, however the cost is combined into the mortgage interest rate. This means your monthly mortgage payments will be lower. However, this does mean you end up paying more interest overall.
Regardless of what you choose, the most important thing is to be smart about it. Choose the option that fits best with your finances, both short term and over the life of the loan. If you can’t make the 20% down payment, make sure you are well read in your options. Make sure to talk to your lenders to find out the best route to take.
And speaking of which, we here at Vermont Mortgage Company can answer these questions, and many more! Our loan officers are waiting to help, so give us a call at 802-863-2020, or visit us on the web: vermontmortgagecompany.com.