While shopping for a mortgage loan, you may encounter the phrases “No mortgage insurance" or "no PMI” being advertised by some lenders.
What is PMI? Private mortgage insurance (PMI) is an additional insurance that lenders typically require if a borrower makes a down payment of less than 20% of a home’s value. Then, once the borrower has built enough equity to reach 22% of the home’s value, PMI is removed. As listing prices have steadily increased over the years, this has become a common practice.
And that’s why “no PMI” can be so enticing.
In reality, PMI is often replaced by an alternative with a different name. But the idea remains the same: Borrowers will still pay higher costs in some fashion if they’re unable to put down 20%. Here are the most common PMI alternatives to be aware of.
Lender-Paid Mortgage Insurance (LPMI)
With LPMI, the lender pays the monthly mortgage insurance premiums for you. To make up the difference normally covered by PMI, you may receive a higher interest rate on your loan, which results in a larger monthly payment. And unlike borrower-paid PMI, LPMI cannot be canceled; the higher interest rate remains for the entire loan term unless you refinance.
Government-backed alternatives to PMI
There are a few government-backed loans that have different rules for mortgage insurance.
- VA loans. Mortgages through the US Department of Veterans Affairs generally don’t require monthly mortgage insurance. In its place is a one-time VA funding fee (typically ranging from 1.25%-3.3% of the loan amount) that can be rolled into the loan. This can be a fantastic option for veterans as the program typically comes with lower rates.
- USDA loans. Loans backed by the US Department of Agriculture collect a one-time guarantee fee and an annual fee. The guarantee fee, paid upfront, is typically 1% of the loan amount. The annual fee, collected monthly, is generally 0.35% of the outstanding principal. The only way to remove the annual fee would be to refinance into a different loan program.
- FHA loans. Most programs backed by the Federal Housing Administration include an Upfront Mortgage Insurance Premium (UFMIP) and Annual Mortgage Insurance Premium (MIP). UFMIP is paid at closing, and the MIP is collected monthly. MIP is automatically canceled after 11 years if the initial down payment was 10% or more. (Anything under 10% will require MIP for the life of the loan.) Another way to remove MIP is by refinancing to a conventional loan.
While “no PMI” sounds like a dream scenario if you don’t have 20% for a down payment on a mortgage, just be aware that the tradeoffs often have different names but similar concepts. Taking out a mortgage loan is one of the biggest decisions you can make, so don’t be afraid to ask questions to understand all of your options (and the meaning behind the terms).
Please contact SELCO Mortgage if you have any questions or would like more information on these products.
