When you plan to buy a new home and start looking for a mortgage loan for nurses, you want to save as much as possible for a down payment. Hopefully, you can put at least 20% twenty percent of the purchase price down.
If you don’t have 20% to put down as a down payment, then you’ll need to purchase private mortgage insurance (PMI) from your lender. PMI protects the lender in the event that you default on the loan. It doesn’t protect you from anything – so it’s just an additional cost that increases the rate of your mortgage loan.
PMI rates vary according to what your lender requires, the amount of the loan, and the size of the down payment. Charges are generally around one-half of one percent.
Suppose you purchased a home for $200,000 and were only able to put down ten percent ($20,000). Your mortgage loan amount would be $180,000 and your lender would calculate the PMI charge by multiplying $180,000 by 0.005. The result would be an annual PMI charge of $900, which adds an extra $75 to your monthly bill.
You will be required to pay for PMI until your equity in the home exceeds twenty percent. Because you pay interest rates in the first years of a mortgage, it can take many years to lower the principal enough to be rid of PMI. But if you live in a location where housing prices are increasing rapidly, then you can do it a lot faster. When your home appreciates to the point where the equity is over twenty percent, you can have the PMI charges dropped. Normally, a home appraisal is required in order to prove that the home’s value has increased, and this is at your expense. The appraisal can cost a few hundred dollars, but it will be worth it because your monthly payment will be reduced.
PMI charges are not deductible, (the interest you pay on your mortgage is tax-deductible, so this is another advantage of paying the principle to your mortgage down as quickly as possible.
If you want to avoiding PMI, there are a couple of options, even if you can’t afford to put 20% down.
One option is to do an ”80-10-10″ loan. This option involves taking out two mortgages – one for 80 percent of the sales price and one for 10 percent. The remaining 10 percent would serve as your down payment.
You would be charged a higher interest rate for the 2nd mortgage. But since the amount you are borrowing is lower, it would still cost less than paying one mortgage with PMI. You also receive an additional savings because the interest would
all be tax deductible.
Paying a higher interest rate to start is also a way to avoid paying PMI. Lenders will often waive PMI if you agree to pay a higher
rate until your equity exceeds twenty percent. When your equity reaches 20% your rate would be reduced. Besure to get these terms in writing.
The rate increase for such a loan usually ranges from 0.5 to 1 percentage point. The higher your down payment, the lower the increase. The added interest is tax deductible, so you save in having your taxes reduced each year.
{ 1 trackback }