Down Payments: PMI, FHA Loans, and 80/10/10 Home Mortgages
Posted by admin on Mar 31, 2009
Almost everyone dreams of one day owning their own home. But for some, gathering the “required” 20 percent down payment to qualify for a home mortgage can be daunting. Fortunately, there are some options out there for those home buyers who struggle to gather together the full 20 percent. Just as with any aspect of a home mortgage, however, there are upsides and downsides to each of these options. And whether or not lenders will be willing to work with your on the terms of the home mortgage and down payment depends heavily upon the condition of the market at the time you apply.
Private Mortgage Insurance
In general, lenders prefer for potential buyers to put a 20 percent or higher down payment on a home in order to get the best terms for their mortgage. If, however, you cannot make such a large down payment, a lender may require that you obtain PMI, or Private Mortgage Insurance. If you find yourself unable to pay your mortgage, PMI protects the lender from losing money.
In general, PMI will cost around half of a percent of the price of the property you are purchasing. If obligated to purchase PMI, the final costs of your home mortgage will be higher than they would otherwise. Fortunately, when you have gained equity in your home (you’ll need 20 to 22 percent) you can request that the PMI be cancelled.
A variation on this arrangement is an FHA loan, which will be insured by the government. With a government insured FHA loan, you may be able to qualify for a mortgage with a down payment of just 3 percent or more. Because FHA loans are insured by the government there are specific criteria for qualification that can vary by county. To find out whether or not you might qualify for an FHA loan, speak to a loan officer or a mortgage broker.
80, 10, 10 Home Mortgages
Home buyers who do not wish to incur the expense of buying Private Mortgage Insurance have another option. They can go for an 80/10/10 home mortgage. With this option, you will use a second home mortgage to finance part of the down payment. Essentially, a large mortgage will pay 80 percent of the purchase price of your home. You will take out a second mortgage to pay a down payment of 10 percent. The rest of the down payment, another 10 percent, you will need to pay on your own.