Buying a house: A down payment of less than 20% will add PMI.
Down payments & PMI:
Typically, buyers put down 5 to 20% of the purchase price but this can be as little as 3%. Buyers putting down less than 20% are required to pay Private Mortgage Insurance (PMI) monthly until they build up 20% equity in their home.
Where PMI comes in
If you make a down payment of less than 20%, you’ll have to pay PMI each month until you build up 20% equity in your home. Take the time to understand PMI as the cost can be relatively small in comparison to the value of being able to secure a 30-year fixed-rate mortgage sooner rather than later.
What is PMI?
For homeowners who put less than 20% down, Private Mortgage Insurance or PMI is an added insurance policy for homeowners that protects the lender if you are unable to pay your mortgage.
It is not the same thing as homeowner’s insurance. It’s a monthly fee, rolled into your mortgage payment, that’s required if you make a down payment less than 20%. While PMI is an initial added cost, it enables you to buy now and begin building equity versus waiting five to 10 years to build enough savings for a 20% down payment.
While the amount you pay for PMI can vary, you can expect to pay approximately between $30 and $70 per month for every $100,000 borrowed.
PMI in action
A $200,000 HOME: 5% DOWN VS. 20% DOWN
| 5% DOWN PAYMENT | 20% DOWN PAYMENT | |||||
|---|---|---|---|---|---|---|
| Down Payment | $10,000 | $40,000 | ||||
| Loan Amount | $190,000 | $160,000 | ||||
| Mortgage Type | 30-year fixed-rate | 30-year fixed-rate | ||||
| Interest Rate | 4.5% | 4.5% | ||||
| Monthly Mortgage Payment (Principal and Interest) | $962.70 | $810.70 | ||||
| PMI | $80.75* | $0 | ||||
| Total Monthly Payment (Excluding Property Taxes, Insurance) | $1,043.45** | $810.70** | ||||
*Assuming an insurance rate of 0.51%; this cost can be cancelled from your payment once you reach 20% equity in your home for conventional loans, but not FHA loans
**Does not include property tax and homeowner’s insurance payments.
PMI isn’t forever
Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your monthly payment. If you’re current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original appraised value of your home. If you choose to use PMI, be sure to talk with your lender about these specific details of your policy.
Down payment assistance programs
You’ve found your first home and your lender has approved you for a mortgage. But there’s one catch — you’re short of the cash needed for a down payment. Help may be available.
Where to turn for help
Every year, many state, county and city governments provide financial assistance for people in their communities who are well-qualified and ready for homeownership. Requirements vary, but if you’re eligible you could receive down payment assistance ranging from a few thousand dollars to larger amounts, depending on your needs, your qualifications, and where the home is located.
Additionally, many programs specifically benefit veterans, Native Americans, and workers employed in education, health care, law enforcement, and firefighting are available.
Types of help
- Grants – Funds that you do not have to pay back as long as you own and occupy your home for a certain period of time.
- Second mortgage loans – The most common down payment source, many second mortgage loans offered by state and local governments have low or zero interest rates, and the payments are deferred over a specified time span and, in many cases, the loan is completely forgiven over time.
-
Tax credits – Certain states and local governments, including housing finance agencies (HFAs), issue mortgage credit certificates, which reduce the amount of federal income tax you pay. This makes more money available upfront for your down payment or closing costs.
Source: https://myhome.freddiemac.com/
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