If you purchase a property with less than 20 percent down, you most likely will end up paying private mortgage insurance, more commonly referred to as PMI. PMI, although it may allow you to secure a home loan without saving up 20 percent, it will cost you every month in the form of a PMI payment, which is on top of your mortgage and taxes every month. For many homeowners, this extra payment can be quite costly, as PMI can run as high as a few hundred dollars, depending on the loan program and the amount of the down payment.
Many homeowners just assume that they have to pay PMI. While this used to be the case, homeowners today can now opt for single-pay mortgage insurance, which reduces the long-term mortgage payment.
Single-Pay Mortgage Insurance
Although PMI helps home buyers secure mortgages they otherwise could not have afforded, this type of mortgage insurance does not benefit the homeowner in a financial sense. However, single-pay mortgage insurance provides the consumer with the option of paying a portion of the future PMI payments at a discounted rate during escrow instead of financing PMI into their monthly mortgage payment.
Choosing single-pay mortgage insurance provides buyers with a number of benefits, including lowering their debt-to-income ratio, which may improve their ability to qualify for the loan, lowering their monthly mortgage payment, and decreasing the cost of the loan.
The Downside to Single-Pay Mortgage Insurance
Not everyone will be able to take advantage of single-pay mortgage insurance, as it does require a larger upfront payment due at escrow. On average, home buyers who choose single-pay mortgage insurance must pay about 1.75 percent of the loan at closing.
Further, for buyers who don’t anticipate staying in the home for long, they may not recoup the upfront payment for single-pay mortgage insurance. In addition, paying off the loan early also negates the advantage of choosing single-pay mortgage insurance.
Not all lenders off the single-pay mortgage insurance, so make sure to ask your lender ahead of time if this is something you can do.
Posted by Richard Soto on
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