Mortgages, Down Payments and PMI.Oh My!

posted 5/29/2014 in Mortgage

We’re not going to sugarcoat things; the home buying process is pretty complex. There are a lot of moving parts and things home buyers need to know.  It’s not always easy to remember all of these different things, which is why Lincoln Savings Bank and LSB Mortgage are a great resource to help you through the home buying process. 

One thing that many home buyers, both first-timers and veterans alike, forget about is their down payment and private mortgage insurance. These two items are related and can influence how you approach the entire process, so let’s take a few moments to discuss them.

Your down payment

Since homes are expensive assets, no one is expecting you to have the full amount of the home saved prior to purchasing. Your down payment is basically saying, “Yes, I will buy the house, but I only have this much right now to get started.” It is made with cash that you have saved and is in your checking or savings account.

Different loan programs have varying limits regarding the percentage of the down payment you have to make initially. While it may seem nice to have a low down payment, the higher down payment you can make the better.  You will be borrowing less, meaning you will pay less interest on the borrowed amount over time AND if you make a high enough down payment, you won’t need private mortgage insurance.

What is private mortgage insurance (PMI)?

When your down payment is over 20 percent of the value of the home you are purchasing, your lender will not require you to have private mortgage insurance. For those making a down payment of less than 20 percent, you will be required to get PMI. It is a way for lenders to protect themselves in case you default on your payments. The thinking is that since you are making a low down payment, you have less of your own money at stake and more at risk of defaulting.

Most PMI fees are between 0.3 and 1.15 percent of the original value of the loan amount per year. Here’s how it works:

  • You are buying a house that costs $200,000, and you make a 10 percent down payment. This means you are borrowing $180,000.

  • The mortgage insurer charges a 0.49 percent annual premium. They take the $180,000 loan amount and multiply it by the annual premium percentage, 0.0049.

  • $180,000 x 0.0049 = $882. That’s your annual premium.

  • Divide that by 12 to get your monthly payment: $882 / 12 = $73.50

The good news is that PMI only lasts for a certain period of time. Keep track of your principal balance, because once your loan-to-value reaches 80 percent you can notify your insurer that it’s time for your PMI to be discontinued. When you close, your lender is required to tell you the exact amount of time it will take for you to reach that 80 percent mark. Even if you forget, lenders must cancel policies when the ratio reaches 78 percent.

What this means for home buyers

The key takeaway here is that if you want to avoid PMI, you will need to have saved enough money to make a 20 percent down payment on your home. If not, just be aware that you will have to take out a PMI policy along with your mortgage.

The mortgage lenders at Lincoln Savings Bank and LSB Mortgage will be glad to help you understand your mortgage situation and provide you with the best solution for your needs.  Call or come by your LSB office or log on to www.lsbmortgage.com to get started!

Lincoln Savings Bank, Member FDIC

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