Private Mortgage Insurance (PMI) is required on most mortgages to protect the lender in case the borrower defaults on the loan. If a potential homeowner can’t come up with 20% down, PMI may be required to qualify for a loan. This can add a substantial amount per month to mortgage payments. Potential homeowners seeking mortgages may not understand or even realize what PMI is and how it will affect their monthly payments. If a potential homeowner is seeking a mortgage for a property in the Village area of Brookline, MA listed at $450,000, they will need to come up with $90,000 down to meet the 20% requirement. If they are not able to do this, the lender may require PMI be added onto their loan raising their payments by several hundred dollars a month. .
|image by Wikipedia|
There are options open to homeowners who can’t come up with this much of a down payment. One option is for the lender to pay the PMI, known as LPMI. This cost is added onto the total of the mortgage, but may lessen the financial burden faced by the homeowner. Another option is to seek out no PMI mortgages. An FHA loan is one of these options. Borrowers pay 1.75% of the loan’s amount upfront at the time of settlement. Another option available for FHA loans is 0.5% to 0.55% fee is spread out over one year and added to your monthly mortgage payments. This can save homeowners thousands of dollars in the life of their loan.
On a property listed at $450,000 in Plymouth, MA the homeowner would pay $78,750 at the time of settlement. This is much less than paying PMI for the life of the loan or until loan amount reaches at least 80% of the home’s listed price. (Termination of PMI is not automatic. Homeowners must initiate the termination process once the loan amount reaches the 80% point.)
Another option for an FHA loan is to pay a higher annual premium for the life of the loan. This annual premium is charged until the mortgage amount comes to 78% of the appraised value or sales price of the home. Potential homeowners should be aware the premium is locked into the loan for at least five years. Paying discount points will decrease the interest rate, but does nothing to reduce the annual premium, although this may be a decision the borrower makes to recoup some of the premium amount on the loan. An FHA loan is a viable option for potential homeowners who are unable to come up with the required 20% down. FHA loans only require 3% and by paying an upfront premium or an annual premium, homeowners can save thousands of dollars over the life of their mortgage.