If you put less than 20% down on a home and use conventional financing, you’ll need to pay for Private Mortgage Insurance. Many people sigh as they hear about PMI because they know it’s just going to make their mortgage payment higher.
Did you know that paying your PMI monthly isn’t the only option, though? You can also pay your PMI all at once – it’s called single premium PMI. You pay the full amount of premium at the closing and you don’t have to pay it again.
This method isn’t for everyone, though. We’ll help you discover if it’s right for you or not.
How Long Will You be in the Home?
If you pay the full PMI premium at once, it means that you plan to stay in the home for the long-term. If you up and move after just a few years, you’ve likely wasted a large amount of money. When you pay PMI monthly, you pay 1/12th of the annual premium. If you move after three years, you’d only make 36 payments of PMI. Chances are that 36 months isn’t enough to pay off the full PMI premium.
If you know this is your ‘forever’ home or at least your home for the foreseeable future, paying the PMI upfront can help. You then have a lower monthly payment and don’t have to worry about requesting the cancellation of the insurance once you owe less than 80% of the home’s value.
Will You Refinance?
Even if you think you’ll stay in the home for the long-term, think about whether or not you will refinance. Of course, that’s hard to determine right now, but you can give it your best guess. Are you the type that likes to take money out of your home’s equity? If you’ll consider a cash-out refinance, don’t pay the PMI upfront. Every time you pay off the loan and take out a new loan, you’ll have new PMI on the new loan. The money you paid on your current loan will be gone.
If you think you may take out a second loan, such as a home equity loan or home equity line of credit, then you don’t have to worry. Your first loan remains untouched when you take out a second loan. This means that if you paid the PMI upfront, you’d still be in good shape.
Make sure you keep this in mind if you change your mind down the road and decide to refinance even after paying the PMI in one lump sum.
Will You Make Home Improvements?
You pay PMI on a loan when you owe more than 80% of the home’s value. If you make renovations and increase the home’s value, you may owe less than 80% sooner than you thought. If that’s the case, you could be wasting money by paying the Private Mortgage Insurance upfront.
If there’s a chance that you’ll renovate the property in the next few years, avoid paying the PMI all at once. Once you complete the renovations, you can pay for another appraisal. If it’s determined that you’ll owe less than 80% of the home’s new value, then the PMI will fall off automatically. If you paid it upfront, you might pay too much.
Other Options to Pay PMI
Paying your PMI monthly or in one lump sum isn’t the only way to pay it. You have one more option – the lender paid mortgage insurance.
Some borrowers are able to negotiate with their lender to obtain lender paid mortgage insurance. As the name suggests, the lender pays the insurance for you. In exchange for the insurance payment, the lender will increase your interest rate, typically around 0.5%. This way the lender makes the money back that they paid for you in the higher interest rate.
This can be a good option for the buyer that will be in the home for a short time. Paying the higher interest rate for the short-term won’t be too terrible, as it would cost less than paying the PMI yourself. If you stay in the home too long, though, you’ll pay an inflated interest rate long past when the PMI would be canceled as most policies are canceled around 11 years after buying the home.
Paying PMI upfront or asking the lender to pay it can be a good option for some. Make sure you discuss all of the terms of either option and compare it to the standard option of paying the PMI yourself. This way you know which option makes the financial sense for you.