If you are buying a house and you’re putting down less than 20%, you will need private mortgage insurance or PMI. The same holds true with refinancing — if you refinance your current loan but have less than 20% equity in your home, you will need private mortgage insurance. Is there only one way to pay for this insurance? How much does it cost? Can you avoid it all together? This article will discuss 4 options for private mortgage insurance, their costs, and the pros and cons of each option.
4 Options for Private Mortgage Insurance
- “Zero monthly” PMI
- Single premium PMI
- Lender paid PMI
- 80/10 loan
Option 1: “Zero Monthly” PMI
“Zero Monthly” PMI refers to the fact that with this type of PMI, you don’t need to pay anything at closing for private mortgage insurance. But you do pay PMI every month along with your principal, interest, taxes, and homeowner’s insurance.
How much does this type of PMI cost? In general, the cost is based on your loan amount, loan-to-value, and credit score. Lenders obtain this insurance for you from companies like Genworth, MGIC, or Radian.
Here’s an example: you’re buying a house for $300,000 and putting down 10%. Your loan amount is therefore $270,000 and your loan-to-value is 90.00%. Assuming your credit score is 680, zero monthly PMI will cost you $146.25 per month.
Pros of Zero Monthly PMI:
you don’t have to pay anything up front at closing
Cons of Zero Monthly PMI:
you have to pay PMI every month until you can have it removed
How long does PMI stay on your loan?
When you pay PMI every month with your mortgage (like with zero monthly PMI), you keep paying PMI for at least 2 years. After 2 years, if you have 25% equity, you can have the PMI removed.
Option 2: Single Premium PMI
Another way to pay PMI is to take out what’s called “single premium” PMI. With this form of PMI, you make one payment up front at closing and you don’t have to pay PMI along with your monthly payment. How much does single premium PMI cost? Using our example above, it costs $5,373.00. That’s a lot of money, but it might be worth it to you to make that kind of payment so you can keep your monthly mortgage payment lower.
Pros of Single Premium PMI:
You don’t have to pay PMI every month
Cons of Single Premium PMI:
You have to make a large payment up front at closing
Option 3: Lender Paid PMI
What if your lender paid for the PMI, not you? Wouldn’t that make sense? With lender paid PMI, the lender absorbs the cost of private mortgage insurance but they pass along a portion of that cost to you by charging a higher rate. How much higher? Check with your lender to find out but rates for lender paid PMI are usually at least 1/4% or more higher.
Pros of Lender Paid PMI:
You pay your PMI through your interest rate. If you are able to deduct mortgage interest, you now have an increase in that deduction.
Cons of Lender Paid PMI:
This type of PMI stays on your loan until you pay it off or refinance.
Option 4: 80/10 Loan
With an 80/10 loan, you take out two loans — one for 80% of the purchase price and another loan for 10%. You are still borrowing 90%, but by breaking your loan up into two parts, you avoid paying PMI. How? Because your first loan is at 80%. It’s only when your first loan is more than 80% that you need to pay PMI. However, the rate on the 10% loan is often higher than the rate you’d get on the first mortgage. These 10% loans are usually structured as a Home Equity Line of Credit, which can vary when rates change.
Pros of 80/10 Loan:
You don’t pay PMI at all
Cons of 80/10 Loan:
You might pay a higher rate for the 10% loan
Which option is right for you? Only you can answer that after you sit down with your lender and go through the numbers. If you’d like to talk to one of the experienced loan officers at Amerifund, call us at (888) 650-7316 or fill out this form and someone will contact you.