The Different Types of PMI
When you’re buying a home on a budget, chances are that you are either struggling to arrange for a 20% down payment or planning to put a smaller down payment for repairs, furnishings, or backup funds. If for practical reasons you made a down payment of less than 20%, your lender would require a Private Mortgage Insurance (PMI) as compensation for taking the risk of lending on a lower down payment as opposed to borrowers willing to pay for a higher amount. It comes in different forms and this guide will help you better understand what your options are, to spend as little extra costs as possible.
There’s a lot to factor in even if it’s not your first time buying a home. Our real estate training program, however, can help you learn more about owner financing as well as how to get the home of your choice in Houston without being overwhelmed by the paperwork. The third-party owner financing gives aspiring homeowners privileges of a bank-approved homebuyer including a 30-year amortization period with fixed monthly payments and reasonable interest rates. It also gives the flexibility to re-finance through a conventional lender without pre-payment penalties. Explore the Houston housing market by filling out the MLS form below and let us know if you find a home in your budget and desired location. We will get you on your home buying journey in no time.
What’s a PMI?
It’s lender-required insurance for homebuyers who put down less than 20% of a home’s value. Unlike most insurance, PMI protects lenders should a homebuyer falls short on monthly mortgage payments. It can cost anywhere between 0.25-2% of the borrower’s annual loan balance but it will depend on three factors:
- Size of the Mortgage Down Payment
- Loan Terms and Conditions
- Borrower’s Credit Score
Because it’s based on a percentage of the overall mortgage amount, PMIs can be more expensive (and costly) if a larger amount is borrowed. It also goes higher within the given range if a borrower yields a higher risk factor.
The Different Types of PMI
Borrower-Paid Mortgage Insurance (BPMI)
This is the most common arrangement lenders make for low-down-payment mortgages. It’s added to your monthly mortgage payment until you’ve paid for 22% equity of your home (based on its original purchase price). Once you reached that point, the lender automatically cancels the BPMI and if you’re consistently up-to-date on your mortgage, you’re done with BPMI in about 11 years.
There are a few ways to break free from BPMI sooner such as mortgage pre-payments (to reach the 22% equity sooner), refinancing, or property appreciation.
Single-Premium Mortgage Insurance
It differs from BPMI because borrowers pay for the insurance in lump sum and upfront which can be done in full (at the time of closing or financed into the loan amount. While borrowers cover a huge amount in one-fell-swoop, it lowers monthly costs which, in turn, can help you refinance your loan for your home instead of BPMI. Those who choose to go the SPMI route also won’t have to watch their LTV value ratio every now and then just to check when the PMI will get canceled.
Split-Premium Mortgage Insurance
This BPMI-SPMI hybrid lets borrowers pay a portion of the PMI in a lump sum with the rest being covered on a monthly basis. That way, borrowers no longer need to come up with large amounts of cash as they normally would with a regular SPMI while getting lower expenses for their BPMI. These reduced rates would also give you more financial freedom to either increase your equity and get rid of PMI faster or save up for some home improvements and other expenses.
Lender-Paid Mortgage Insurance
Simply put, Lender-Paid Mortgage Insurance (LPMI) shoulders the insurance instead of the borrower. It sounds too good to be true but you’re not off the hook as lenders make up for this additional mortgage insurance cost with higher interest rates. It remains unpopular because borrowers are unable to cancel the additional monthly costs even if they’ve reached the 20% equity for the property, they’ll be paying for interest instead of PMI.
PMI can work to your advantage and reduce the complications of the homebuying process. In the meantime, you can narrow down your search for the perfect Houston home with these available properties.
Disclaimer: Shop Owner Finance/ TL Global is not a lender. We are a real estate training agency. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.