When Is Private Mortgage Insurance Required?
PMI is an acronym you might hear when you're buying a home, but what is it short for? PMI stands for private mortgage insurance, and this is cost you will have to pay if you don't have 20% down payment.
What is PMI?
It's insurance that protects your lender, not the borrower in case of default on the mortgage. PMI can be either private and government-backed.
If you have a government-funded loan, such as an FHA loan, the mortgage insurance is also a government product. However, private mortgage insurance (PMI) is paid to a corporate entity.
If ever you should default on your mortgage, PMI pays the benefits to your lender. Lenders often require PMI of home buyers if they put down less than 20% of the home’s value. Lenders will require PMI for buyers who put down less than 20% because these homebuyers are more likely to foreclose. Since the risk of loss is higher, the lender protects their investment by requiring you to pay for insurance.
While it's an undesirable expense, you can view this as a trade-off for being able to buy a home with a down payment as little as 3% or 5%.
How Much Does PMI Cost?
The cost of PMI ranges from about 0.3% to 1.15% of your home loan, and often paid in monthly installments. However, you may have the option to pay the entire premium up-front at closing or include it into the cost of the home loan.
Contact us to learn more about your PMI options, and let us help you compare the long and short-term costs.
Do PMI Payments Continue Until The Loan is Paid Off?
When you reach at least 20% equity in your home, you can request to cancel your PMI. Even better news is that when you reach 22% equity, cancellation is required. With FHA loans, however, mortgage insurance will last the lifetime of the loan. But remember that you can refinance out of an FHA loan! Once you reach at least 20% equity, refinance into a PMI-free mortgage, possibly lowering your payments.
Can PMI Be Avoided?
You may be able to avoid non-government-backed PMI by:
- Paying a higher interest rate. Also known as lender-paid PMI, this can’t be canceled. Refinancing will be necessary to get a lower rate.
- Using a piggyback a loan to help cover the down payment. These loans often have higher interest rates --we can help you calculate the cost to see if this is a viable solution for you.
- Get a new home appraisal if you think property values and upgrades have increased your equity.
Also, PMI may not be required for certain loan programs even if you have less than a 20% down payment. These types of home loans often expect excellent credit, along with meeting other conditions. Contact us for more information.
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