When you put down less than 20 percent on the purchase of a home, you are going to have to pay Private Mortgage Insurance. Luckily, this does not mean that you are doomed to paying higher monthly payments for the rest of your life. You do have the option to pay the mortgage insurance premium up front, which is known as single premium insurance. This option is becoming more common as potential homeowners want to get into a home, yet do not want to be burdened with the higher monthly payments or the lower loan amount because their debt-to-income ratio suffers once PMI is added into the payment.
How Single Premium Insurance Works
The single premium mortgage insurance is one lump sum that you pay at the closing. It is figured into your closing costs and increases the amount of cash that you are required to bring to the closing. The figure is determined by a set percentage (typically around 1.75% of the loan amount) that is required to pay the insurance at once. Once you pay it at closing, you do not have to make any more PMI payments. If you are staying in the home for more than 3 years, this is typically the best option as it can save you a significant amount of money as you will not pay the inflated fees that come with stretching the premium out over a series of months, rather than paying it all at once.
Increase your Ability to Obtain a Higher Loan Amount
One of the largest benefits of paying the mortgage insurance premium up front is the ability to qualify for a higher loan amount. When you add monthly PMI payments into your mortgage payments, it gets figured into your debt-to-income ratio. This takes away from the amount of money that you could be paying towards principal and interest, which means that you will be forced to take a lower loan amount, especially if your debt-to-income ratio is tight.
Staying in the Home
A consideration to make when determining whether or not you should pay your mortgage insurance premium up front is the length of time that you plan to be in the home. There is no time frame that is set in stone to be the ideal amount of time to make paying PMI up front worth it, though. You will need to calculate the difference to see which option is best, if you do not plan on staying in the home long term, which in terms of a home means around 3 years. If you pay it up front and do not stay in the home, you run the risk of paying more than you would have owed had you been paying it monthly.
High Credit Requirements
Every lender has their own requirements, but in general a credit score of 700 and sufficient verifiable assets will be necessary to get approved to pay the insurance up front. Some lenders also closely scrutinize your debt-to-income ratio to see if you are a good candidate to use up such a large portion of your assets in order to pay the insurance up front, as this takes away from your emergency fund should something go awry with your finances in the future. If you are really interested in single premium insurance, you might need to shop around with several lenders to find one that not only offers this program, but will approve you for it.
Single premium mortgage insurance has many benefits for homeowners that plan to stay in the home for many years. The discount that is offered for upfront payment is typically significant enough to save you quite a bit of money every month as well as in the long run. If you know that you are going to have a loan that is above 80 percent, it is well worth looking into your eligibility for the single premium insurance to see just how much you could save.Click to See the Latest Mortgage Rates»