PMI, also known as private mortgage insurance is typically added on to a mortgage payment when the borrower has less than a 20% down payment. Many homebuyers may avoid private mortgage insurance because they think it's a bad idea but it will allow buyers to own a home much sooner, capitalize on their home appreciation, and avoid any rising rents in their area. Saving up 20% down payment is not a bad idea, but it's not necessarily required nor even beneficial. There are many reasons why you might want less than 20% down payment. But for the sake of this blog post let's talk about the four different types of private mortgage insurance.
#1. Borrower paid mortgage insurance
This is the most common type and is awfully refer to as simply PMI. This is the default type of mortgage insurance and it can be canceled when your loan principal drops to 78% of the home's value. That means if you reach 22% equity in your home, you can call and have it canceled. The percentage is basically the lesser of the original purchase price or the current appraised value. This is a good option for borrowers/buyers that may not stay in their home very long or decide to refinance later on. There's no upfront cost and no waiting period to cancel it with a refinance or lump-sum payment should you choose.
#2. Lender paid mortgage insurance.
Also referred to as LPMI, this is where the lender pays the mortgage insurance for you for a fee. They will raise your mortgage rate so that they can cover the cost of a lump-sum buyout of your mortgage insurance. You may have a lower mortgage payment than if you pay the mortgage insurance yourself and it could mean that you'll qualify for a larger home. However, this type of mortgage insurance cannot be canceled. It is built into the interest rate and that rate doesn't go down when your home or just 22% equity. This might be a good solution for a homebuyer planning to stay in the home at least 5 to 10 years. It typically takes about 10 to 11 years to build enough equity to cancel a borrower-paid mortgage insurance policy.
#3. Single premium private mortgage insurance.
This is where the homeowner will pay the mortgage insurance premium upfront in one lump sum. It's very similar to a lender paid mortgage insurance but without the higher rates. The home buyer pays for the buyout in cash or by financing it into the loan amount. The single premium is nonrefundable so this is best for those that plan on staying in their homes for a long time and it can always be refinanced in a few years.
#4. Split premium private mortgage insurance.
This is the least common type of mortgage insurance but it might be a good option, which allows the homeowner to pay a portion of the insurance in a lump sum at closing and the remaining paid in monthly installments, typically along with your mortgage payment. The buyer will get a discount on their monthly insurance since the portion was already paid up front. This could also bring down your monthly payment enough to qualify for a larger home.
So how much are you likely to spend each month in a mortgage insurance payment?
There are a lot of different factors including the loan amount, the terms of the loan, the type of loan, your credit history and score, and the loan to value ratio. Typically a premium can range from .2% to over 1% of the loan amount per year paid in monthly installments. So which kind of PMI is best for you? There are benefits to each type of mortgage insurance so it's a good idea to understand your terms, the type of loan you have, and how long you're planning on staying in the house.