If you are new to home buying, you will soon find out that most lending institutions require that loan applicants put 20% down when applying for a mortgage, or you will need private mortgage insurance.
Of course, there are exceptions to this rule, of course, as some financial institutions will accept applications even in this turbulent home buying market with 10% down. Go online first and contact a couple brokers or several lenders through a service like LendingTree.com which will find you four mortgage loan offers.
Buying a Home With Private Mortgage Insurance
If you do not have the 20% down payment, then you will be required in almost every instance to buy private mortgage insurance which is also known simply as PMI. Private mortgage insurance is merely protection that is purchased to preserve the interests of the lending institution in case you default on your mortgage payments.
If you apply for VA, FHA, or RHS funding, you normally will be required to buy private mortgage insurance as these government-backed loans usually do not require much in the way of a down payment. When applying for a loan, you will need to inquire about the criteria for the down payment.
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If the down payment is not substantial and you must buy private mortgage insurance, inquire about the expense. Ask what the premium each month will be and the terms. It might also be beneficial for you to ask about the requirements for dropping PMI when you reach the 20% equity threshold.
If you are applying for a second mortgage or refinancing your home, you will need to obtain private mortgage insurance if the amount of your loan is above 80% of the appraised value of your home.
When you are shopping for a mortgage, you will need to consider the following information:
- The kind of mortgage (Is it conventional, fixed-rate, FHA, or adjustable?)
- The amount of the down payment
- The time frame for the loan
- The APR
- Discount points
- Interest rate
- PMI premiums
- How long you must make payments toward the PMI
- An estimation of the escrow payment per month (includes taxes and insurance)
- The monthly payment (an estimate of the principal plus taxes, insurance, interest, and PMI)
You will also have to look at the numerous fees that can be assessed with respect to your mortgage application. Fees can include charges for processing the application, the origination fee, funding charge, attorney fees, document processing fees, broker charges, and the appraisal fee.
Fees can be negotiated and you may even be able to convince the seller to assume part of the fees for the closing costs. Along with private mortgage insurance, charges can impact what you will end up paying overall.
Therefore, it is important to scrutinize them carefully. All fees are negotiable, and it can really pay dividends if you double check what you are being charged.
Go online first and contact a couple brokers or several lenders through a service like LendingTree.com which will find you four mortgage loan offers. That way, you can calculate what you can handle as far as a down payment.
If you have not built up enough resources in order to afford a down payment, then there are loan packages that can still make it possible for you to own a home with little down. As mentioned, many government-backed loans do not require sizable down payments.
Private Mortgage Insurance and the Return on Investment
With the stock market treading water lately, there are only a few options where you can earn a decent and guaranteed rate of return on an investment. You may actually think that any type of guaranteed rate of return is impossible in today’s market, but I have found one place where I can earn a great rate of return on my money…my mortgage. Paying off PMI can be a great return on your investment.
Paying Off Debt as an Investment
Typically, you think about the interest you save when you pay off a debt. If you have a credit card balance on a card that charges you 16% annual interest, for example, paying that balance off is exactly like earning a 16% rate of return on an investment.
Instead of paying your credit card company that percent in interest, your cash flow increases instead as a result of paying down that debt, and you can use that money for other ventures such as investments or building your emergency fund.
One place that many of us do not consider very often is the private mortgage insurance that we pay on our home loans. If you do not put at least a 20% down payment on a conventional home mortgage, your lender will almost always require you to purchase private mortgage insurance, more commonly known simply as PMI.
The Cost of Private Mortgage Insurance
While the cost of PMI is not very expensive when compared to your total mortgage, taxes, and insurance payments on your home, these additional payments that are tacked onto your mortgage in escrow can begin to add up over time. It can be beneficial to pay off PMI. For example, a $200,000 home in which you paid 10% down and secured a mortgage of $180,000 for the balance would typically require approximately $100 per month to be paid for private mortgage insurance.
This is again on top of your principal and interest payments. Not only will it cost you $1,200 per year in PMI payments that do not reduce your principle, but you will be paying those fees for the next six years until you get your equity to the magic 20% level where PMI can then be waived. PMI over those six years will ultimately cost you $7,200 over that time, and it can be a great thing to pay off PMI.
But, what if you could pay more on your mortgage principle in order to reach that 20% level of equity faster? Would that be a good return on your investment? It turns out that it would. It would be a good use of your funds when compared without investment opportunities and their rates of return. If you had $20,000 available to invest in paying down your home mortgage, you could eliminate your need for PMI.
You may think that $20,000 is a lot of money to pay in order to save only $100 per month. In fact, an investment in your mortgage to speed up paying off PMI would equal a 6% annual rate of return on that investment. And, that does not even include how much interest you would save by paying off a portion of your mortgage early.
With that one-time investment in your mortgage of $20,000, you could ultimately pay a 30 year fixed rate mortgage off in as little as 22 years instead of thirty. That alone could also save you tens of thousands of dollars in mortgage interest payments.
Adding to Your Mortgage Payments
I know what a lot of you are probably thinking. There is no way that you have $20,000 just lying around to invest in paying down your mortgage. But, maybe you have a few thousand dollars that you can use to pay down your mortgage right now. Maybe you can sell a car that you really do not need. Maybe, instead of it taking you six years to reach that 20% equity level, it only takes you three years if you really attack your mortgage payments.
Are you paying more than your minimum monthly payments on your mortgage? By even adding a little bit towards each monthly payment, you can end up shaving years off the total amount you pay for your mortgage. To continue using the example from above, you can pay a 30 year mortgage off in as little as 25 years if you add $100 to each of your monthly mortgage payments.
While the economy seems to have hit a skid and the stock market is spinning its wheels, there are other alternatives to investing that you can pursue that will earn you a decent rate of return on your money. There are unique ways to earn a competitive interest rate if investing is not providing you with a large enough rate of return.
If you are middle or lower income and cannot swing 20% down, count on including private mortgage insurance in your mortgage payments. PMI is just one of those necessary expenses you must assume for securing a loan with a lower down payment.
Have you bought a home and had to get private mortgage insurance too? Did you pay extra to try and get PMI over with as fast as possible?