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Historically it has been believed that you need a 20% down payment to buy a home. This qualification can be limiting to say the least and with home prices on the rise it can seem nearly impossible to save up that size down payment. Thankfully today home buyers can purchase a home with as little as 3% down. The secret to buying a home without the 20% down payment is PMI (Private Mortgage Insurance).

Who is PMI for?

PMI is a protection that is put in place to protect the lender when the buyer is purchasing a home with a conventional loan and they have less than a 20% down payment. The lender needs the security of the PMI to feel confident that they are protected in the event that the buyer were to default on their loan and it became lender owned.

PMI is a fantastic and flexible solution for anyone who wants to buy a home but doesn’t have the full 20% saved.

What is PMI?

PMI is an insurance policy. You, the borrower pays the insurance premium but the policy is in place to protect the lender who loaned you the money to buy the home. 

Why 20% Down?

The down payment of 20% isn’t arbitrary. This amount is outlined because if you own 20% of the home you are purchasing on day one, the lender is at less risk if you were to default on your loan. This means that you own enough of the home yourself that it is less risky to loan you the money to pay for the rest of the home. 

PMI is a mortgage insurance that is designed to protect the lender when the buyer does not have 20% equity in the home.

How Much Will PMI Cost?

PMI can be paid monthly, upfront or by the lender. Monthly PMI is added into your mortgage payment each month. This is the most common type of PMI. Upfront PMI is a lump sum paid by you as part of your closing costs. Lender paid MI is paid by the lender and structured into the interest. The premium amount is determined based on your credit score, mortgage, loan term and the size of your down payment. According to Freddie Mac you can expect PMI to cost between $30 and $70 monthly per $100,000 borrowed. 

Can I Avoid Paying PMI?

PMI is typically associated with conventional loan requirements. If you don’t have a 20% down payment you can still avoid paying PMI if you qualify for a VA home loan program or by adding a simultaneous second mortgage. 

When Do I Stop Paying PMI?

The PMI payment would be included on your loan payment until you own 20% of your home value. There are a few ways you can get your PMI removed. The first would be to pay down your mortgage until the cancellation kicks in, you can ask for a cancellation by getting a new valuation on your home or you can refinance your home and the new appraisal may verify you have 20% equity in your home and PMI is no longer required.  

PMI has had a negative connotation. However it is truly a helpful tool to make homeownership possible with a minimal impact on the monthly payment. 

If you are looking to buy a home in the current Upper Valley real estate market, you need a team of local real estate experts on your side. We have the privilege of partnering with the best local agents, appraisers and attorney’s the Upper Valley has to offer. When you work with Legacy Mortgage you are working with the best local professionals from beginning to end. Reach out to the Legacy Mortgage team to get started get the loan process started. Call us today, 603-643-7400.