What are Down Payment Assistance & Private Mortgage Insurance?
In today’s economy and with other financial obligations, many first time homebuyers need some down payment assistance (DPA) to be approved for the mortgage they want. DPA is used to cover whatever part of your necessary 20% down payment you need for your mortgage.
Mortgage lenders require buyers to put down at least 20% of the amount of their loan to be approved, and offer down payment assistance in the form of Private Mortgage Insurance (PMI) to help buyers get their mortgage. PMI is added to your mortgage and you pay your PMI monthly with your mortgage payment until you reach 20% of your loan. PMI not only allows buyers to get approved without having the full down payment, but also provides protection to the lender should you default on your loan.
How Long Will It Take to Pay Back?
The most important factor you must consider before committing to such an investment is the real responsibility that you hold as the borrower. Make sure that you can truly afford the mortgage that you are taking on. Remaining current in your payments is a priority. Not only does it reflect favorably on your credit rating, but it is also a must have when you are ready to sever ties with your down payment assistance lender by cancelling it or allowing it to terminate. After you’ve paid 20% of your mortgage to your lender, your PMI may either be cancelled or terminated.
- Cancelation of PMI
Once you reach the date that your principal balance is down to 80% of your home's original value (established at the initiation of the loan) or if you reach the 80% mark earlier, you may request that your PMI be canceled.
- Termination of PMI
Most lenders terminate PMI once your principal balance is down to 78% of your home's original value, or when you are halfway through your amortization schedule (payments with original value + interest).
Remember that a significant amount of your monthly payments are applied to the interest first and then the principal. Paying more than your minimum mortgage payment reduces your principal balance, which helps you get rid of your PMI.
If you are a first time home buyer and would like to speak to a trusted lender about down payment assistance, PMI and getting approved for a mortgage, schedule a personalized consultation now!