For many home buyers, one of the biggest challenges to enjoying homeownership is the downpayment.
Thanks to private mortgage insurance, or PMI, U.S. home buyers have a number of low, or even no downpayment options available to them.
Home buyers often try to avoid PMI because they think it’s “bad.” But consider this: PMI allows buyers to own a home much sooner, capitalize on home appreciation, and avoid rising rents.
Sure, home buyers can wait to save up 20%, or exhaust their savings, but PMI could be a much better alternative.
Private mortgage insurance is nothing to be afraid of. It’s simply an insurance policy issued by a private company that lowers risk for the lender.
In turn, lenders can approve a mortgage at well below the 20% down mark. Thanks to PMI, buyers can own a home sooner.
Choosing between 4 types of PMI
Mortgage insurance typically reduces the upfront cost of the home and spreads it out via slightly higher monthly payments. The type of mortgage insurance will determine the length of time for which the homeowner will make the higher payment.
The four types of mortgage insurance does not include those offered with government-backed loans such as FHA MIP, or “mortgage insurance premium.” Rather, these are private mortgage insurance types which are issued with conventional loans, and they come in four varieties:
- Borrower-paid (BPMI)
- Lender-paid (LPMI)
- Single premium
- Split premium
Each type comes with its own advantages that suit various situations. Choosing the right one can put you in an ideal home buying position.
1. Borrower-paid monthly PMI
Borrower-paid monthly mortgage insurance (BPMI) is the most common type and is often known simply as “PMI.” It is the “default” type of PMI, and the payment is tacked onto the regular mortgage payment.
BPMI can be canceled. You pay it until your loan principal drops to 78% of the home’s value. In other words, it drops off when you reach 22% equity in your home.
This percentage is based on the lesser of the original purchase price or current appraised value.
BPMI might be the right choice for a buyer who is unsure how long they will stay in the home or keep the mortgage. There is no upfront cost to this type of PMI, and no waiting period to cancel it via a refinance or lump-sum payment to your principal loan balance.
2. Lender-paid PMI (LPMI)
With LPMI, the lender “pays” your mortgage insurance for you. But they don’t do it for free. Instead, they raise your mortgage rate. A higher rate enables the lender to cover the cost of a lump-sum buyout of your mortgage insurance.