Private Mortgage Insurance, or PMI, allows you to buy a home while putting less than 20% down.
Mortgage loans today allow buyers to put down as little as 3-5% when purchasing a home. But paying less upfront means more risk for lenders. That is where PMI comes in; it’s insurance to protect the lender.
PMI is used by borrowers who do not have a down payment of 20%. This allows people to become homeowners sooner than if they had to save up 20% at the time of closing.
Others may have enough to cover a 20% down payment, but choose to put a smaller percentage down. This can be because they do not want to exhaust their savings, or are planning to use the money for something else, such as renovations.
There are five types of PMI. Four types can be used with conventional loans, and one option for FHA loans. Keep reading to discover the difference between these options.
The most common type of PMI is borrower-paid monthly mortgage insurance. This has become the default for private mortgage insurance. BPMI is added onto the monthly mortgage payment.
BPMI is paid every month until the homeowner reaches over 20% equity of the home, based on purchase price. After that, BPMI is canceled (as long as mortgage payments are up-to-date). In addition, there is no upfront cost to BPMI.
SPMI is when the borrower pays the mortgage insurance upfront instead of split into monthly payments. This allows for a lower monthly mortgage payment and can help the buyer qualify for more home. However, the lump sum is not refundable, so the insurance premium is not returned if the homeowners move after a few years.
Similar to SPMI, LMPI is when mortgage insurance is paid upfront. However, LPMI is paid by the mortgage lender. The lender will raise the mortgage rate in return for paying the insurance premium upfront. This is another option to explore if you want a lower monthly mortgage payment or are trying to qualify for more home. A downside to LPMI is if the homeowner stays in the house long enough to get over 20% equity in the home, the mortgage rate will not go down.
Another type of PMI, though not common, is split premium mortgage insurance. This allows the homeowner to pay a portion of the insurance up front, and the remaining amount is paid in monthly installments.
The final type of private mortgage insurance is for FHA loans and is known as MIP. MIP is a requirement for all FHA loans, even those with a down payment of 20% or more. MIP includes both an upfront payment and a monthly rate added to the mortgage.
If getting a conventional loan, speak with your mortgage lender about what type of private mortgage insurance makes the most sense for you, if putting less than 20% down.
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