What is Private Mortgage Insurance?
Private mortgage insurance, or PMI, is a major consideration for mortgage applicants. PMI has a bad reputation among buyers. It can add hundreds of dollars to your mortgage each month, while adding little perceived value. But a closer look reveals why lenders require PMI in certain cases, how it benefits the buyer, and strategies you can take to avoid it.
Why lenders require PMI
Private mortgage insurance is exactly what it says: it’s a special type of insurance policy that protects the mortgage company in case the buyer can’t make their payments. Whether it’s a medical crisis or a job loss, issues arise all the time that cause owners to default on their homes. What role does PMI play for buyers? It allows them to purchase homes when they have less than the requisite 20% for a down payment.
What does PMI cost?
The cost varies based on a number of factors. But one source estimates that PMI costs approximately $30 – $70 per $100,000 borrowed. On a $500,000 home, you might expect to pay as much as $350 per month in private mortgage insurance costs. It’s important to understand that the costs differ and speak to your lender about your specific situation. Better credit scores and larger down payments typically qualify for better premiums.
FHA Loans, VA Loans, and PMI
If you’re a veteran or you’re going for an FHA loan, you won’t be required to purchase private mortgage insurance. Instead, you’re required to purchase government insurance. FHA loans have an upfront fee and then monthly premiums. VA loan insurance is typically paid as an up-front fee, with no ongoing premiums.
The best strategy for avoiding the need for PMI is saving up enough money to put a 20% down payment. If you’re unable to accomplish this, talk to your lender to see if you qualify for programs that might lower or eliminate the PMI requirement from your loan.
On private loans, your PMI requirements will “fall off” the loan once your loan to value ratio hits 80%. The longer that you pay on your mortgage, the more equity that you build. Once you’ve reached 20% equity in your home (or, stated differently, paid off 20% of the principal of your mortgage) your PMI policy will usually be canceled. It’s important to read the fine print on your mortgage and your policy to confirm this.
Paying PMI sometimes enables buyers to purchase homes when they don’t have a full 20% down payment saved up. Waiting longer while you save or looking at alternative lending programs may help buyers avoid this cost. If you’re interested in learning more about loan options for your situation, contact Sydnee Johnson today to arrange for a personalized consultation and learn more about how private mortgage insurance may affect your specific situation.