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The Pros and Cons of Private Mortgage Insurance

Buying a home with little (or no) down payment comes with other obligations, but is it still worth it?

We just can’t stop talking about what a great time it is for home buyers. Low rates, relaxed lending practices (to a degree) may make it easier for you to qualify for a loan, and of course, property values are increasing, which gives you a great opportunity for a return on your investment.

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Of course, it’s easy to WANT to buy a home, but not always easy to afford the 20% down payment, right? However, lenders will only finance a home up to 80% of its appraised value, so what do you do? There are options to get around facing the seemingly impossible task of saving tens of thousands (or more) of dollars in order to get into the home of your dreams.

There are loans available that offer buyers the opportunity to purchase a home without such a huge down payment. In some cases, you can get in for as little as 3.5% (or less) down. But, those loans do come with a little bit of a catch, but the options may well be worth the “cost of doing business” loan-wise.

What can I do if I don’t have a 20% down payment?

You have a few options. One is a second mortgage, which finances the 20% down payment with its own terms and interest rates separate from your main mortgage loan. The interest rate may be higher than your first loan, so keep that in mind. Other options that may help you maintain a nominal rate on your second loan is a “balloon”, which sets the interest rate at a certain number of years (5, 7, 10, etc.), with the balance of the loan due at the end of the term. Many home buyers will use this option, then refinance to one mortgage loan prior to the loan’s balloon date.

The other option is Private Mortgage Insurance (PMI). The cost of PMI is usually over 1% of the value of the mortgage loan, but this may vary from lender to lender. The cost may be added to your loan, which will increase your mortgage payment. The good news is that PMI is only required until the home’s value rises to 80% of the loan value, you may cancel the policy.

Is it worth going into a home with no money down?

Ultimately, the answer would depend on your own financial situation and loan qualification. However, if you are unable to save up that 20%, then the possibility of getting into an investment whose value will increase over time, with as little money as you can, is not a bad way to go.

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