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Should I Go Big With My Down Payment?
Question:I’m considering an ARM and have the ability to borrow with either 10 percent or 20 percent down. I am fully aware of the danger that my ARM loan rate may go far above the original interest level, but what I’m really concerned about is that with the smaller down payment I will be forced to pay for private mortgage insurance. Should I borrow with 10 percent or 20 percent down?
Answer:Private mortgage insurance – generally known as PMI – is required by lenders when a borrower buys or refinances with a conventional loan and has less than 20 percent equity.
For most borrowers the need for PMI is not debatable because they do not have 20 percent cash or equity. Many of those with the financial capacity to put down 20 percent elect not to do so, believing that their money might be better used for other purposes such as paying off car loans, student debt or high-cost credit card bills. Lastly, some believe that the biggest home loan is best, a way to lock-in a cheap form of long-term financing especially at a time like today when we have such low mortgage rates.
To answer your question you have to consider two issues: First, is there a better use of your cash? This is something only you can decide based on your finances and personal preferences. Second, what about PMI cancellation policies?
In general terms there are two ways to get PMI canceled. First, under the Homeowners Protection Act of 1998 you can end PMI when your loan-to-value ratio (LTV) reaches 78% of the property’s original value. The “original value” is the purchase price or the appraised value at the time of purchase, whichever is less. Your payments must be up-to-date with no past money due.
Second, mortgage investors may allow you to cancel PMI when the LTV hits 80 percent and you have a good payment history, say no 30-day lates in the past year, no 60-day lates during the past 24 months and you’re current on the mortgage. For this option you likely will need a current appraisal which is satisfactory to the lender.
For specifics contact your loan servicer. While you’re at it, ask about a loan “curtailment.” By paying down a big chunk of the mortgage you may be able to not only cancel PMI but at the same time have the lender agree to a lower required monthly payment. Note that not all loans qualify for a modification, some lenders have a curtailment fee, and there may be other requirements which the lender can explain.
Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to firstname.lastname@example.org.View Foreclosure Article Archives
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