Sure some loans cost a lot upfront with down payments as big as 40%. But these loans, e.g. stated income loans and jumbo loans, don’t carry a private mortgage insurance. PMI, which is required when you put down less than 20% in equity, will be included in your monthly mortgage payments. While other homeowners are finding ways to get rid of it, you don’t even have to worry about it when you get a nonqualified loan. Finding lenders is effortless, too.»
Private Mortgage Insurance: Why It Matters Not to Have One?
To be fair, PMI is useful for those who can’t produce or save up that much cash even with gifts for a down payment. They can still get a mortgage but they would have to protect the lender in the form of the private mortgage insurance.
Being your-not-the-usual mortgages, nonqualified loans generally require 20% upward for down payments. This spares their borrowers from the less savory aspects of the PMI, as follows.
1. It’s expensive. The PMI is usually between 0.50% and 1% of the loan amount. Supposing you took out a 5% down $100,000 mortgage and your insurance rate is 1%. That means $1,000 goes to your PMI a year or $83 is being added to your monthly mortgage payment.
While the most common way to pay the PMI is on a monthly basis, other lenders require that the PMI be paid upfront at closing. Some lenders may be the one to make the payment upfront but this cost will be passed on to you in the form of a higher rate.
Other mortgages like FHA loans require mortgage insurance premiums to be paid upfront at closing and in monthly fees.
2. It’s not for you and won’t benefit you. You pay for a mortgage insurance as protection for the lender in the event you default on your loan. Neither you nor your children benefit from the PMI after you finish paying off the mortgage.
3. It’s difficult to cancel or terminate and in some cases, will remain. PMI can be removed if you have built 20% equity into the home or paid down your mortgage that you only owe 80%. In that case, you have to request the lender to cancel the mortgage insurance. Conventional lenders are required to terminate the mortgage insurance if your loan balance reaches 78%. Until your balance reaches any of those levels, you have to continue paying for the mortgage insurance.
The case with FHA loans is more complex as the annual MIP can be canceled if the loan is originated before June 3, 2013 and the unpaid balance is 78%. But the Upfront MIP portion of the FHA mortgage insurance premium is not cancelable.
Are you up for paying a large down payment now to avoid PMI or putting less down payment and pay a mortgage insurance later?