(BPT) – In the 2017 housing market, those who choose to pursue the dream of owning a home face several important decisions, such as how much to put toward a down payment. Twenty percent down is typically recommended by most lenders.
While 20 percent is not a requirement, paying less can have a big impact on the amount you pay monthly. It is important for home buyers to know that when seeking a conventional loan with less than 20 percent down of the sales price or appraised value of the home, lenders will often require Private Mortgage Insurance (PMI).
This article takes a deeper look at PMI by answering the most common questions on the topic.
What is PMI?
PMI is a type of mortgage insurance. Like most other types of mortgage insurance, it protects the lender in the event the borrower is unable to repay the remainder of the loan. In many cases, PMI is required on conventional loans when the buyer has a down payment of less than 20 percent.
Some lenders may offer conventional loans that require a smaller down payment without PMI, but the tradeoff can typically be a higher interest rate.
How does PMI affect your loan?
PMI can affect your loan in several different ways depending on the loan type and the lender. In some cases, the PMI will be required in a lump sum at the time of closing. This PMI payment type is called an upfront premium.
Other PMI plans call for monthly payments where the total value of the PMI is divided and factored into your monthly mortgage payments. The PMI can generally be cancelled under certain conditions once 20 percent of the amount borrowed has been reduced from the principal balance, or amount borrowed.
Finally, the lender may also opt for a plan that requires both upfront and monthly PMI payments. In this case a portion of the PMI is paid at the time of closing, and then the remaining PMI is paid as part of the monthly mortgage payment.
Alternatives to PMI
Some government-backed loans offer alternative options to buyers paying less than 20 percent down on a home loan. There are several of these loans and each has a different approach to handling down payments and mortgage insurance. By being educated on the different types of loans you will have an easier time finding which best suits your needs.
Learning more about PMI
While PMI is an additional fee, it helps those with less than a 20 percent down payment realize their dreams of home ownership.
To learn more about financing options that can make your dreams of homeownership a reality, visit VMFhomeloan.com.
Vanderbilt Mortgage and Finance, Inc., 500 Alcoa Trail, Maryville, TN 37804, 865-380-3000, NMLS #1561, (http://www.nmlsconsumeraccess.org/), AZ Lic. #BK-0902616, Loans made or arranged pursuant to a California Finance Lenders Law license, GA Residential Mortgage (Lic. #6911), Illinois Residential Mortgage Licensee, Licensed by the NH Banking Department, MT Lic. #1561, Licensed by PA Dept. of Banking.