Historically, purchasing a new home required a buyer to have a down payment of at least 20 percent. However, as housing prices continued to rise dramatically in recent decades, this became more and more difficult for homeowners to do.
To meet the demands of home buyers, many banks started offering mortgages with as little as zero percent down. However, to compensate for the additional risk, banks required borrowers to pay private mortgage insurance (PMI) until they had 20 percent equity in their homes.
While it can help avoid having to pay for a large down payment, PMI can be very expensive, and easily be a couple of hundred dollars per month. While PMI is expensive, there are ways to receive a lower PMI payment.
The first way that you could receive a lower PMI payment would be by putting forth more money down at closing. The more money you are able to put toward the down payment, the lower your monthly private mortgage insurance will be. Generally speaking, those who are able to put forth a 10 percent down payment will have a PMI payment about half of those who do not put down any money.
Another way that you could receive a lower PMI payment would be to accept a faster amortizing loan. The longer that the amortization of your loan is, the higher your PMI payment will be. This is because the loan will be paid down slower, which will keep the bank’s exposure high for a longer period of time. Banks will then charge higher PMI to compensate for the increased risk. By reducing your amortization period from 30 to 20 years could cut over a third off of your PMI payment and save thousands of dollars over the course of the loan.
Many borrowers today are still able to avoid PMI altogether by taking out a second mortgage. Some lenders will provide you with a first mortgage equal to 80 percent of the purchase price and then a second mortgage to make up the difference.
These second mortgages tend to have higher interest rates but will allow you to avoid having to pay PMI. Furthermore, the mortgage interest is tax deductible and a portion of your payment on the second mortgages will be applied to principal, which will make it a better financial option over time.
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