Any time you purchase a home with a down payment that’s less than 20% of the purchase price, you’ll need to pay private mortgage insurance, or PMI.
So what is PMI? It’s an insurance policy you’ll pay that protects the lender in the event that you default on your loan.
There are several different ways that you can pay your PMI, so be sure to speak to your loan officer about the options you have.
Everyone these days seems to be concerned about interest rates, asking, “Why are interest rates so high?” or “Are my interest rates causing my monthly payments to be so high?”
In reality, low interest rates rarely ever mean that you’ll necessarily have a low payment. There are four basic ways to structure your PMI on a conventional loan:
- Lender-paid PMI (LPMI). Here, the lender adjusts the pricing so the interest rates will be a little higher, and they’ll pay that premium upfront so you don’t actually have to pay for your PMI on a monthly basis.
- Borrower-paid mortgage insurance (BPMI). With BPMI, a little is added to each of your monthly payments under your PMI policy, but it will go away when the loan-to-value ratio reaches 78% of the purchase price. With LPMI, you have a higher interest rate for the life of the loan; with BPMI, your monthly payment will be higher, but the policy will usually go away after about 10 or 11 years depending on the loan amount.
- Lump-sum PMI premium. This is paid out at closing, and it’s based on a percentage of the loan amount. We run the PMI calculations through the mortgage insurance companies. It does constitute an added closing cost, but you’ll only pay it once and then you’ll never have to worry about it again. With this premium, you’ll get a lower interest rate throughout the life of the loan. It can get costly, but buyers today have started to ask for more seller-paid closing costs, because those concessions can be used to pay that lump-sum PMI premium.
- Split MI premium. With this, you can pay a little bit up front and keep a little bit in your monthly payment to keep the out-of-pocket costs as low as possible.
At the end of the day, you need to make sure that you’re working closely with your loan officer, who can accurately explain all the different PMI options available to you. Your interest rate can affect your monthly payment by about $25 for every eighth of a percent, depending on the loan term and rate, but if you change the way PMI is factored into the loan, there are huge savings to be had.
If you or someone you know has questions about PMI or the different ways it can be structured, please don’t hesitate to reach out to me. I’d be glad to help.