You’ve heard of homeowner’s insurance, but have you heard of PMI? It stands for private mortgage insurance, and you may or may not need it depending on the terms of the loan. You might also hear this referred to as mortgage insurance (MI) – the terms are interchangeable.
Unlike your homeowner’s insurance, which protects your home in the event of damages incurred, PMI protects the lender in the event that a borrower defaults on their mortgage. As you may know, a default is when you stop making your mortgage payment for one reason or another. Ouch – tough to consider, we know. Don't hate the messenger; we come in peace.
Again, not all loans will require this insurance – just the ones where the lender may be feeling a touch of insecurity. In most cases, this means when the borrower’s down payment is less than 20% and they are deemed to have less ‘skin in the game,’ so to speak.
Monthly payments for PMI can range from $30-$70 per month for each $100,000 borrowed. In other words, you could be seeing an extra $140 on your monthly payment on a $200,000 loan. That’s no chump change, if you ask us.
The good news is that you’ll only have to pay PMI until you reach 20 percent equity in your property. So, think of it this way: it’s not forever, but just long enough to help the lender feel confident that you’ll be staying in your home and making your payments for the foreseeable future.
Think you'll need PMI? Here are some payment options:
- Borrower paid mortgage insurance, paid monthly – This is a very common option. The mortgage insurance premium is collected along with your mortgage payment each month.
- Borrower paid mortgage insurance, single premium – This option allows you to pay the entire premium in a lump sum at the time of closing. On a refinance, if you so wish, it can be included in the loan amount.
- Lender paid mortgage insurance – This is another popular option, whereby the lender pays the mortgage insurance premium on your behalf and recoups the cost by charging a slightly higher interest rate.
- Split premium – This option allows you to reduce your monthly premium amount by paying part of the mortgage insurance upfront. You split the mortgage insurance premiums into one upfront amount, and then pay the remaining balance across monthly payments. It will lower your monthly premiums.
There’s one other option that allows you to avoid paying the premium altogether: you can split your mortgage financing into two loans.
If you’re planning to put 10 percent down, this might be the solution for you. Also known as an 80-10-10 loan, this method allows you to split up the mortgage financing into three parts. First, you can apply for a first mortgage that covers 80 percent of the purchase price. Next, you apply for a Home Equity Line of Credit, or a Home Equity Loan, for 10 percent of the purchase price. (The other 10, in case you were wondering, comes in the form of your 10 percent down payment.)
This does mean that you will have two mortgage applications, two closings, and two mortgage payments on your new home. But, you will avoid the dastardly PMI payments if you take this route. Hurrah!
Keep in mind that, generally speaking, only borrowers with credit scores of 740+ will see true savings with this type of arrangement. Borrowers with lower scores may be charged higher interest rates, resulting in a smaller margin of net savings.
The moral of the story? PMI is required for loans with a down payment of 20 percent or less, but only until you reach 20 percent equity in your home. You have some options for different types of payments, and for those with higher credit scores and 10 percent to put down, the 80-10-10 loan might be a viable option.
Whatever type of loan you need, Simplist is here to make the mortgage process simple. Simple is easy. Simple is good. Simplist is here for you.