Florida mortgage insurance guarantees that your lender will get paid if you default on your mortgage. Many mortgage lenders make borrowers purchase insurance, particularly if you can’t put down 20 percent of the property’s value as a down payment. Basically there are two types of mortgage insurance. One type of mortgage insurance is for government-backed loans like those from the Federal Housing Authority (FHA) or Veterans Administration (VA). The other type is mortgage insurance for conventional loans from private lenders, and that’s called private mortgage insurance (PMI).

Typically for conventional mortgages, if your down payment is less than 20 percent of the property’s value, you’ll need to buy PMI. Normally, you’ll pay those mortgage insurance premiums until you’ve paid off 20 percent of your loan. At that point, you can usually request to cancel your PMI. PMI rates are variable, and, in general, the smaller your down payment and/or the lower your credit score, the more your premiums will be. Typically, PMI premiums can cost from $30 to $70 per month for every 100,000 borrowed, so if you buy a $300,000 home, you could pay $150 per month or more for PMI.

How to avoid or reduce PMI

PMI payments can amount to a significant amount of money. So how can borrowers avoid or reduce them? The simplest option is to make a 20 percent down payment. But if your new home costs $200,000, that means you’ll need to put down at least $40,000! A down payment of that size isn’t feasible for every buyer.

Piggyback mortgages. One option for qualified buyers is a “piggyback” mortgage. Piggyback mortgages are second mortgages or home equity loans that are taken at the same time as the primary mortgage. For example, with an 80-10-10 piggyback mortgage, 80 percent of the purchase price is covered by the primary mortgage, 10 percent is covered by the second loan, and the buyer pays the other 10 percent as a down payment.

This lowers the LTV of the first mortgage to under 80 percent, and that means no PMI. So for the $200,000 home we used in our example, the down payment would be $20,000 (10 percent), the second mortgage would be $20,000 (10 percent), and the primary mortgage would be $160,000 (80 percent).

Lender-paid mortgage insurance (LPMI). With LPMI, your lender pays your mortgage insurance up front in a lump sum and passes on the cost to you in the form of a higher interest rate. Typically, the interest rate is a quarter to half a percentage point higher, but it can be higher or lower than that range.

So how is that better? Let’s look at our $200,000 home. Assume that our buyer is getting 4.5 percent interest on a 30-year fixed mortgage, which would make the monthly mortgage payment $912. With an average PMI payment of $100 per month (that’s $50 for every $100,000 borrowed), our buyer will pay $1,012 each month.

With an LPMI, the buyer would pay a slightly higher rate of interest (let’s assume 4.625 percent), but have no PMI payment. The monthly mortgage payment would be $925.

Single-payment PMI. Another option is to make a single, upfront purchase of mortgage insurance. Single-payment PMIs typically work best if you are going to be in a home for three or more years. There are a number of variables to single-payment PMI, including credit scores and down payment amount. If you have excellent scores, especially above 760, you should always compare the standard monthly PMI and the single-payment PMI. Recovery periods usually run about 3-4 years, making this a great option to consider.

Talk to the experts at Embrace Home Loans

These options can help buyers reduce or avoid PMI. The Florida mortgage professionals at Embrace Home Loans can review your financial situation and recommend the best mortgage options for you. Call us today at 800-620-6292 for more information about ways you can avoid or reduce your PMI payments.

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