If you’re interested in buying a house, but don’t have 20% to put down to qualify for a mortgage, don’t worry. Luckily, there are plenty of options for a mortgage that don’t require 20 percent down. Many buyers are taking advantage of these programs. According to the NAR’s latest Realtors Confidence Index, 51 percent of all non-cash buyers put down less than 20 percent in June of 2018.
That being said, buyers should realize that that making a low down payment wlll likely result in a higher interest rate and the addition of private mortgage insurance. (PMI) They should also be aware that PMI increases mortgage costs with little benefit to the buyer. Private mortgage insurance is required by a lender to protect THEM, not the buyer if anything happens that compromises repayment of the loan.
PMI is a form of mortgage insurance that’s often required of less-than-20 percent down conventional loans. Most policies are paid monthly and usually bundled with the monthly payment to the lender. A few allow the buyer to pay the entire PMI premium with a big upfront payment at closing. (Not always a great idea, by the way, but we’ll get to that later.) Buyers choose the lump sum payment option because the amount of the premium is discounted significantly compared to monthly payments for the life of the loan. There is no set premium for all buyers. The cost is determined ny perceived risk to the lender. Credit score and amount of downpayment both affect the premium.
Here are three things buyers should be especially aware of:
1. PMI can be cancelled.
Typically, PMI can be stopped as soon as the principal balance of the mortgage falls to 78 percent of a home’s original value. As we mentioned earlier, PMI can be paid off up front, but if the mortgage value reaches 78 percent and the lender cancells the insurance, there is no refund of the balance of the one-time payment.
2. PMI and MIP are different
There are different types of mortgage insurance. PMI is associated with conventional loans. A mortgage insurance premium (MIP) is what borrowers pay toward FHA-insured loans.
The most important thing for buyers to remember is that the rules governing PMI and MIP differ. While borrowers can cancel PMI, refinancing is often the only way to eliminate MIP.
3. Buyers should be sure to use the services of a knowledgeable loan officer.
While real estate agents should understand what loan options are available to buyers, staying on top of the changing rules regarding mortgages just isn’t realistic for REALTORS®. By referring buyers to a knowledgeable, competent loan officer, REALTORS® can safely assume that their buyers will get the guidance they need to make an informed decision when applying for a loan.
Barry Goldenberg, Senior Loan Originator for Luxury Mortgage contributed to this article. He can be reached via email at firstname.lastname@example.org.