How can you make a down payment of 20% or less and avoid PMI?
To start, you must have really good credit. In other words, your credit score must be in the high 700s. There’s a strong correlation between your credit score and how much mortgage insurance you pay—stronger than the correlation between your credit score and your interest rate.
For example, let’s say you purchase a house for $230,000, you put down less than 5% for a conventional loan, and you have a credit score in the 700s. In this scenario, your PMI will be a little over $2,600. Lenders have different programs for all types of buyers, and if you have good credit, there are plenty of options available to you, but in this case, you have three choices in terms of what you can do with that PMI.
First, you can take that entire $2,600 sum and add it into your loan. In effect, you would finance it, but you wouldn’t pay it on a monthly basis, which would leave your regular monthly payment at about $1,056. Second, you can just pay it monthly, which would increase your monthly payment to $1,105. Lastly, you can pay the $2,600 sum up front with your 5% down payment, which would decrease your monthly payment to $1,044.
This was an actual scenario one of my clients faced recently, and she chose option No. 1. Keep in mind, though, that this is a simplified scenario because with each option there will be different interest rates and cash-to-close amounts, depending on which programs your lender offers.
Whether you have good or bad credit, there are all types of programs available to you, so the best thing you can do is talk to a good lender and find out which one best suits you. To find a good lender, reach out to your Realtor and have them help you. Odds are, they work with plenty that they’d be happy to recommend to you.
Here at Real Estate Experts, we work with an excellent selection of lenders that we can put you in touch with, so if you’d like to know more about this topic or you have any other real estate questions, feel free to give us a call or send us an email. We look forward to speaking with you.