Let’s talk about Private Mortgage Insurance, or as we know it, PMI and it’s alternatives. When you apply for a mortgage, the lender will typically require a down payment equal to 20% of the home’s purchase price. If a borrower can’t afford that amount, a lender will likely look at the loan as a riskier investment and require that the homebuyer take out PMI, also known as private mortgage insurance, as part of getting a mortgage.
It’s important to realize, though, that mortgage insurance — of any kind — is neither “good” nor “bad”. Mortgage insurance helps people to become homeowners who might not otherwise qualify because they don’t have 20% to put down on a home. But as it adds to the total cost of your monthly payments, many wonder what options they have.
Thanks to Brett Burns, Vice President and Senior Mortgage Specialist of Directors Mortgage, we learn about a few alternatives to traditional monthly PMI. This is extremely useful information and we’re happy to share it with you!
There are three main alternatives to traditional monthly PMI. First off, there’s single premium PMI. In this scenario a lump sum fee is paid at closing to buy out the full PMI premium, resulting in no monthly PMI payment. This helps to lower a borrower’s overall payment and increase qualifying. This is often used when there is a seller credit or builder credit towards closing costs.
Second, there is lender paid PMI. Similar to single premium, this option eliminates the monthly PMI payment, lowering the overall mortgage payment. The main difference is that lender covers the costs of the PMI buyout with a slight increase in interest rate.
Lastly, we have split PMI. In this option there is a smaller upfront buyout fee which lowers the monthly PMI payment. This can be a great combination for many borrowers.
As always, please feel free to reach out to us with any questions—we’re here for you!