Fortunately, thanks to private mortgage insurance (PMI), U.S. homebuyers have a number of low, or even no down payment options available to them.
When homebuyers have less than 20% to put down on a home, or perhaps they just don’t want to exhaust their savings, private mortgage insurance can be a great alternative.
Private Mortgage Insurance, also commonly known as PMI, is an actual insurance policy issued by a private insurance company. Mortgage insurance is designed to protect your lender in case of default.
Lenders typically require mortgage insurance on conventional loans with down payments of less than 20%. Likewise, PMI is also required on conventional loans for homeowners who are refinancing but have less than 20% in equity.
TYPES OF PRIVATE MORTGAGE INSURANCE
Regardless of how the insurance is paid, mortgage insurance will typically result in a higher monthly mortgage payment. The type of mortgage insurance will determine the length of time for which the homeowner will make the higher payment.
Not to be confused with FHA mortgage insurance, also known as MIP or Mortgage Insurance Premium, mortgage insurance for conventional loans will typically come in four different varieties:
- Borrower-Paid PMI
- Lender-Paid PMI (LPMI)
- Single Premium PMI (BPMI)
- Split Premium PMI
Borrower-Paid PMI (BPMI)
Borrower-paid mortgage insurance is the most common type of PMI. BPMI results in a higher monthly mortgage payment at first. However, the PMI will be canceled at a certain point resulting in a lower payment.
If you pay monthly PMI, you make a premium payment every month until your PMI is either terminated (once the homeowner reaches 78% loan-to-value, or gains 22% equity in their home. This percentage is based on the original purchase price or appraised value, the lesser of the two.
Lender-Paid PMI (LPMI)
With LPMI, the cost of the mortgage insurance is included in the mortgage interest rate for the life of the loan.
Lender-paid mortgage insurance will often result in a lower monthly mortgage payment as compared to having the monthly PMI added to the payment. Having a lower monthly mortgage payment could mean qualifying for more home.
It’s important to note however, because the mortgage insurance is built into the interest rate, homeowners cannot rid themselves of the PMI once they reach the 20% equity position without refinancing.
Single Premium PMI
With this type of mortgage insurance, the homeowner pays the mortgage insurance premium upfront in one lump sum, eliminating the need for a monthly PMI payment.
Financing the mortgage insurance into the loan can mean less cash will be required at closing. This is ideal for homebuyers who may be tight on cash.
Single (or Single Financed PMI) will also result in a lower monthly payment, or the ability to qualify for more home.
The single premium can typically be paid in full at closing, or it can be financed into the mortgage.
Probably the least common type of private mortgage insurance, split mortgage insurance is a great option, allowing the homeowner to pay a portion of the insurance in a lump sum at closing. The remaining amount is then paid in smaller monthly installments.
Similar to LPMI and Single Premium PMI, Split PMI generally results in a homeowner being able to reduce their monthly payment and ultimately qualify for more home.
HOW MUCH DOES PRIVATE MORTGAGE INSURANCE COST?
The costs of PMI can vary from one lender to the next, but is typically based on the costs passed along from the actual insurance companies.
The amount paid for mortgage insurance premiums are based on the following:
- Loan amount
- Terms of the loan
- Loan-to-value ratio
- Type of loan
- Amount of coverage required by the mortgage company
PMI premiums can range from .2% to over 1% of the loan amount. As an example, based on a $200,000 loan amount, at an annual premium of .5%, the homeowner would pay $83.33 per month.
WHICH TYPE OF PRIVATE MORTGAGE INSURANCE IS BEST?
Because there are substantial benefits to each type of mortgage insurance, homebuyers should consider the different options between different PMI structures.
Much like interest rates, PMI can have different premiums depending on the type of mortgage insurance. Be sure and ask your lender about the various options so that you can compare each possibility and decide which one is best for you and your family’s needs.