Coming up with a down payment can be one of the biggest obstacles to buying a home. Even if you earn enough to afford a monthly mortgage payment, it can take years to save up a down payment—especially if you think you need 20% down. Although this is a standard down payment amount, the good news is that many homebuyers purchase with far less. Today, many home loan programs allow down payments as low as 3% to 5% or even 0% down. If you take advantage of a low down payment mortgage, though, it’s important that you understand how private mortgage insurance (PMI) works.
1. What is Private Mortgage Insurance?
Private mortgage insurance, or PMI, is a type of insurance that’s often required when buying a home with less than a 20% down payment. As the homeowner, you’ll pay PMI monthly premiums with your home loan payment. This type of insurance protects your mortgage lender in the event of default.
Private mortgage insurance is specific to conventional home loans, which typically require a minimum down payment between 3% and 5%. But this isn’t the only type of mortgage program that requires mortgage insurance. USDA and FHA home loans also require mortgage insurance when a borrower puts down less than 20%.
FHA home loans, which are insured by the Federal Housing Administration, need a minimum 3.5% down, in which case you’ll pay mortgage insurance for the life of the loan. If you get an FHA home loan with at least 10% down, you’ll only pay mortgage insurance for the first 11 years.
USDA home loans, insured by the U.S. Department of Agriculture, don’t require a down payment, but you’ll pay mortgage insurance for the life of the loan. There’s no mortgage insurance with a VA loan insured by the U.S. Department of Veterans Affairs.
2. How to Get Rid of Private Mortgage Insurance?
If you decide to purchase a home with a lower down payment and pay the PMI, you may be possible to eliminate this expense in the future.
If you have a conventional mortgage, the good news is that mortgage lenders waive mortgage insurance once the property has at least 22% equity, although you can request its removal once the property has 20% equity.
To get rid of mortgage insurance with an FHA home loan, you would have to refinance the mortgage once the property has 20% equity, getting either another FHA home loan or another type of mortgage. This also applies when getting rid of mortgage insurance with a USDA home loan.
Private mortgage insurance makes it easier for buyers to purchase a home. To learn more about mortgage insurance and discuss your home loan options, contact the Mortgage Bankers at FirstBank Mortgage or fill out the contact form.
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