Putting down 20% of a home’s purchase price eliminates PMI, which is the ideal way to go if you can afford it. In addition to saving regularly for a down payment, consider buying a less expensive home.
Piggyback Mortgages and PMI
Some lenders recommend using a second “piggyback” mortgage to avoid PMI. This can help lower initial mortgage costs rather than paying for PMI. It works like this: You take out a first mortgage for most of the home’s purchase price (minus your down payment amount). Then you take out a second, much smaller mortgage for the remainder of the home’s purchase price, less the first mortgage and down payment amounts. As a result, you avoid PMI and have combined payments less than the cost of the first mortgage with PMI.
However, a second mortgage generally carries a higher interest rate than a first mortgage. The only way to get rid of a second mortgage is to pay off the loan entirely or refinance it (along with the first mortgage) into a new standalone mortgage, presumably when the LTV reaches 80% (to avoid PMI). However, these loans can be costly, particularly if interest rates increase from the time you take out the initial loan and when you’d refinance both loans into one mortgage.
FHA Mortgage Insurance Premium
If you can’t qualify for a conventional loan product, you might consider an FHA loan. Like some conventional loan products, FHA loans have a low-down payment option-as little as 3.5% down-and more relaxed credit requirements.
Lenders require mortgage insurance for all FHA loans, which are paid in two parts: an up-front mortgage insurance premium, or UFMIP, and an annual mortgage insurance premium, or annual MIP. Both costs are listed on the first page of your loan estimate and closing disclosure.
The Upfront Insurance Premium
The upfront mortgage insurance premium (UFMIP) is 1.75% of the loan amount. You can pay it at up-front at closing or it can be rolled into your mortgage. If you opt to include UFMIP in your mortgage, your monthly payments will be higher and your total loan costs will go up.
The Annual Premium
In addition to the UFMIP, you’ll pay an annual MIP, which is divided into equal monthly installments and rolled into your mortgage payments. Depending on your loan term and size, you’ll pay 0.45% to 1.05% of the loan amount.
Canceling FHA MIP
If you put 10% or more down, annual MIP can be canceled after the first 11 years of your loan. However, unlike conventional loans, FHA loans with a down payment below 10% require you to pay annual MIP for the life of the loan. If you fall into the latter camp, the only way to eliminate MIP payments is to refinance into a conventional loan, once your LTV ratio is low enough to qualify for a conventional mortgage without PMI.
The Bottom Line
If you don’t have a lot of cash saved for a down payment, paying PMI is a tradeoff you’ll make to borrow more money. You’re not alone if you choose this path. These days, most homebuyers are making down payments https://americashpaydayloan.com/installment-loans-mo/ below 20%. In 2017, the median down payment on a home was 10%, according to a survey by the National Association of Realtors.
As you apply for mortgages, look carefully at loan estimates to compare how much you’ll pay for a loan with PMI. A loan that might not require PMI but comes with a higher interest rate. With few exceptions, PMI is difficult to avoid if you need a loan with a low down payment, but there is light at the end of the tunnel: You won’t pay PMI for the life of the loan.