In the past, if you put less than 20% down on the purchase of a home, you would be forced to pay an extra monthly payment called Mortgage Insurance or, PMI. This is an insurance policy that compensates a lender for potential losses occur when a borrower defaults on a mortgage and the bank takes back to property and sells it for less than the balance owed at the time.  These monthly premiums are typically very high.  Until now..

New Lower PMI premiums make it very affordable to buy a home with as little as 5% down

Let’s compare two loan scenarios using a purchase of $650,000 with a 5% down payment, a FICO score of 760, and each at the same rate (4.99%; 30 year fixed).

Option A:  Loan with No PMI

Loan Amount $617,500
Borrower Loan Fee $11,701.63
Principal & Interest Payment $3,311.10

Option B: Loan with PMI 

Loan Amount $617,500
Borrower Loan Fee $2,747.88
Principal & Interest Payment $3,311.10
PMI Premium $$154.38
Total Principal & Interest & PMI $3,465.48

While the payment on Option A is lower by $154.38, the cost to obtain the loan without PMI is $8,953.75. It would take nearly five years to make up the difference.  Will your loan last 5 years?

In this writer’s professional opinion, saving nearly $9,000 up front is a far better choice.

Consider this additional information..

PMI on a conventional loan is removed when the balance of the loan drops to 78% of the original purchase price. The borrower can also request removal when the balance dips to 80%.  If you know you will be coming into some extra funds – funds sufficient to pay down your loan to 80%, this makes the decision pretty easy.

Down Payment Amount will alter the PMI Premium

The more you put down, the lower the PMI premium. With an additional 5% down payment (total of 10%), the PMI premium (using the same purchase price scenario above) is reduced to just $97.50.  And with another 5% down, the premium is only $50.65.

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