The mantra over the years has been that if you put less than 20% down on your home purchase, or if you want to refinance and have less than 20% equity, you must pay for private/monthly mortgage insurance (PMI).
But be encouraged! There are a number of positive changes that have been introduced into today's housing market that have aided homeowners nationwide in avoiding the liability of having to pay PMI; or at least in significantly minimizing it's impact on your finances.
Here are a few options:
1) UP-FRONT BUYOUT - Buying out PMI right out of the gate is an outstanding way to eliminate the hefty monthly premiums that so easily hamper a family's ability to afford the necessities of life from a cash-flow perspective. And it's cheaper than one might think. This is especially helpful if the home-owner/buyer plans on staying in the home for an extended period of time (as little as 2 years in many cases). The net savings of this choice can be dramatic over the long haul and can free up monthly reserves in case the little ones need shoes or you'd just like a night out once in a while.
2) MIX IT UP - Hybrid mortgage insurance options allow a buyer or refinance client to pay a smaller portion than a full buyout up front in exchange for a lower monthly premium. Many view this as the win-win avenue in that they don't have to part with a considerable lump sum of money and yet can manage the cheaper premium on a monthly basis.
3) BUMP AND RUN - Another option for the savings-minded individual is really quite clever. This choice allows the home-owner/buyer to bump the interest rate slightly in exchange for eliminating PMI altogether. The thought process is that since mortgage interest is tax deductible, a small bump in rate cancels out any negative effects via the tax break vs. paying PMI. Theoretically, PMI is not deductible so it may make all the sense in the world to take advantage of this option. This is a tricky one and we generally don't recommend it for anyone planning to stay in their home for more than 5-7 years. Since we're not tax experts, it's best to check with your tax preparer to weigh the cost benefit from a tax vantage point.
One final note... With the exception of it's more lenient stance on credit issues (i.e. Bankruptcy, Foreclosure, etc...) FHA is no longer the best deal when it comes to purchasing a home with very little money down. Unless you opt for a 15 year mortgage with FHA, you will pay mortgage insurance for THE LIFE OF THE MORTGAGE....ugh!!! The conventional loan options presented above far and away give you the best bang for you buck with a down payment obligation even less than that of FHA!! We're in this with you for the long haul and want to help you make the right choices when considering the future of your real estate endeavors for you and your family. Let's talk about it. Connect with us!