PMI (Private Mortgage Insurance) is typically setup as an additional payment to your mortgage if you don’t have a 20% down payment or a 20% equity position when refinancing. This additional payment does not go towards the principal balance or the interest paid on the mortgage. It’s collected by the lender, because of the risk of equity position.
The only positive thing about mortgage insurance is that it’s tax deductible, but even that comes with limitations. See here for more details about this.
How Single Premium Works
Single premium mortgage insurance is a percentage of your loan amount. Your situation will determine what that percentage will be, because many factors are involved.
Example:
Your are buying a home for a sales price of $200,000. The down payment is 10%, so your loan amount will be $190,000. It’s a single family home, term of 30 years, fixed rate, and a 740 credit score. The single premium percentage will be 2.7%. Multiple that by your loan amount and the single premium amount is $5130. (190,000 x 0.027)
This single premium amount is a one time cost, in exchange for no monthly PMI.
The Trick Most Buyers Are Not Aware Of
A conventional mortgage through Fannie Mae allows the seller to pay up to 3% of the purchase price in closing cost credits to the buyer. Using the example above, 3% of a purchase price of 200k is $6000. The single premium mortgage insurance is considered a cost of the mortgage loan. If you are able to get the seller to give you a 3% closing costs credit, (which is easy right now in a buyers market) you have just avoided monthly PMI through single premium.
Avoid PMI When Refinancing
The single premium option is also available when refinancing your mortgage. Using the same example above, instead it’s a refinance, your single premium is $5130. This is considered a cost for the refinance, so you can include this into the new loan amount. One advantage, since you are essentially financing the mortgage insurance, you can deduct the mortgage interest you are already paying, especially if you don’t qualify for the tax deduction on the mortgage insurance.
Remember, there are ways to avoid PMI even if you don’t have a 20% down payment or 20% equity position in your home. These programs are out there, you just have to work with an experienced mortgage broker to help with all of this.
More Advice:
Fannie Mae HomePath Program Will Pay 3% Of Your Closing Costs
How To Figure Out The Value Of A Home
