If you are a beginner real estate investor, you probably don’t have enough cash to buy a property and will need to take a mortgage with a minimum down payment. To get your property financed in that way, you need to learn all about the private mortgage insurance, a requirement for taking a loan with less than 20% of down payment.
What is private mortgage insurance?
Private mortgage insurance, or PMI, is a type of insurance that many property buyers are obliged to get when taking out a conventional loan. Mortgage insurance was designed to protect lenders against defaulting borrowers. From investors’ perspective, private mortgage insurance has been helping many first-time property buyers get approved for loans and buy real estate properties that they would not be able to afford otherwise.
When are you required to have private mortgage insurance?
A private mortgage insurance is most common with conventional loans, when real estate investors and property buyers are looking to buy a real estate property with a minimal down payment. So, if your down payment is less than 20% of the total value of the property, the lender will most likely require you to get PMI.
In any case, the property buyer will continue to pay for the private mortgage insurance until the loan-to-value ratio is 80%. In other words, you will keep paying the PMI premiums until you reach that ratio.
On the other hand, if you apply for a government-backed loan, then Fannie Mae and Freddi Mac will require private mortgage insurance for the entire duration of the loan. Make sure to factor that in if you’re buying an investment property with no money down.
If you want to get into real estate investing but don’t have the cash payment to back it up, read this blog post: How to Start a Real Estate Business with No Money in 2018.
Is private mortgage insurance expensive?
There’s not just one type of private mortgage insurance. Automatically, rates and premiums are going to vary. Of course, there are many factors that can inflate or deflate the private mortgage insurance rates: the amount of down payment that you’re putting on the investment property, your credit score, and the insurance institution itself.
Usually, the private mortgage insurance rate varies between 0.5% and 1% of the original loan size per year. This means that if you take a loan of $100,000, your monthly payment will typically be between $41.7 and $83.3. Meanwhile, for FHA loans, there’s an upfront mortgage insurance premium and annual premium which the real estate investor or property buyer will make monthly payments on.
To see how mortgage and insurance rates will affect the ROI on your rental property, check out this tool.
Types of payment methods for PMI
It’s very important to be aware of the type of private mortgage insurance that your lender offers along with the mortgage itself. Here are three common payment methods for private mortgage insurance:
This is the most common way to pay for private mortgage insurance. Most lenders will add the monthly premium to your mortgage payment. Of course, you have to be fully aware of these details as these premiums can magnify your monthly mortgage payments.
A great private mortgage insurance option is to pay an upfront premium all at once at the closing. The only downside to the upfront premium payment method is that you’ll lose the premium paid if you choose to refinance or sell the investment property.
Upfront and monthly premiums
This is not a very popular option for real estate investors and homebuyers. However, it gives property buyers more options when financing their investment properties and helps lower the private mortgage insurance premiums every month.
Tip: These options may be available through your lender. If you’re getting an investment property mortgage, make sure to ask about all the details that you don’t understand.
Should I go for a loan that requires private mortgage insurance?
The concept behind mortgage insurance is to help real estate investors and property buyers get approved for loans to buy properties that they cannot afford otherwise. In an ideal scenario, you should look for a loan that does not require you to get private mortgage insurance. On the other hand, some of these lenders may offer you a PMI-free loan while raising interest rates on the loan. Accordingly, it’s better to consult with a loan broker and a tax advisor to weigh the options for your case.
Meanwhile, many property buyers are going for FHA loans. There are many types of loans, some may be more or less expensive than a conventional loan with the PMI included.
In any case, when financing investment properties, property buyers are highly encouraged to have a 20% down payment as a minimum. This, in return, helps the property buyer to land lower interest rates on the said mortgage.
Keep in mind that leveraging and misusing debt can be an issue if not dealt with correctly. Read this blog post to learn how you can use debt to your advantage when buying an investment property: The Art of Using Debt to Buy Real Estate.
When do you not need private mortgage insurance?
There are cases where you won’t need to get private mortgage insurance for your conventional loan. Let’s take the conforming loan that was launched in a partnership between Bank of America and Freddie Mac as an example. This type of loan is targetted for low-income property buyers and requires a down payment of 3% only. This type does not require private mortgage insurance.
Additionally, qualified veterans can go for a VA loan with 100% financing with no down payment and no mortgage insurance required. Moreover, some credit unions might wave the private mortgage insurance requirement if the applicant has a strong credit report and a strong financial portfolio.
The private mortgage insurance industry is one that brings real estate investing and property ownership to the hands of most people. You can buy an investment property or a personal residence with a minimal down payment but at a cost. So, if you’re currently under a loan with private mortgage insurance, make sure to inform your lender once you hit the 20% equity in your property. This can save you a bundle in monthly premiums.
What’s your experience with private mortgage insurance? Did it help you land a loan? How did it affect your ROI?
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