The home buying process varies. In some instances, new homeowners are able to complete the loan process and move into their new home within a few weeks. On the other hand, it may take several weeks to close on the loan. Individuals who purchase a new home are also required to pay certain fees. Among these includes private mortgage insurance.
What is Private Mortgage Insurance (PMI)?
Private mortgage insurance is intended to protect the lender if you default on your home loan. Traditionally, mortgage companies require home buyers to have a down payment of 20%. Of course, having a large down payment is nearly impossible. New and young home buyers are unable to save for down payments. In addition, the increase in home prices makes it difficult to save for a large down payment.
With private mortgage insurance, home buyers are only required to save 3% to 5% for a down payment. The lender will finance approximately 80% of the home loan, and the private mortgage insurance policy will cover 20% of the home loan. Once a policy is chosen, the home buyer completes the loan process. At closing, home buyers are required to pay for the policy. This amount is included in the closing costs.
Ways to Eliminate Private Mortgage Insurance
If you do not have a 20% down payment for your home, there is no way to avoid paying private mortgage insurance. To avoid paying PMI at closing, home buyers may research loan programs that offer grants to new home buyers. The downside is that most programs have income restrictions. If your yearly income exceeds the limit, you will not qualify for these loan types.
In some instances, a home buyer may be able to negotiate with the seller. If the seller is motivated, they may be willing to pay a portion of your closing costs, which may include PMI. Of course, you may still be responsible for paying any monthly PMI fees. Moreover, once the equity in your home reaches 20%, you are no longer required to pay private mortgage insurance. If you maintained a good payment history, and you owe less than 80% on your mortgage, consider refinancing your home loan. You will eliminate PMI and reduce your monthly mortgage payment.
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Carrie Reeder is the owner of ABC Loan Guide.
