The Basics of Private Mortgage Insurance
There are not many things that are as exciting and stressful as buying a house, especially if it is your first house. However, there are some essential details you may not know a lot about that you should learn before looking for your perfect home. One of them is called private mortgage insurance. Private mortgage insurance is not the same as homeowners’ insurance. Homeowners’ insurance protects you and the house and is something you need to have as long as you own your home. Private mortgage insurance protects the lender, and you may not need it. Continue reading to find out all the details you need.
What is Private Mortgage Insurance?
Private mortgage insurance (PMI) is a specific type of insurance that is required by traditional mortgage lenders when a homebuyer does not have at least 20 percent of the purchase price to put down on the house. PMI is intended to protect the lender if you do not make the payments on your house. It will not protect you from foreclosure; however, it allows you to buy a house even when you cannot afford to put down 20 percent of the value of the house. The lender determines if you need to pay PMI. If so, they will work with the private insurance provider. You are presented with the terms outlining how much you have to pay before you sign the papers to close on your mortgage.
PMI does not last forever. Once you have acquired 20 percent equity in your home, you can contact the lender and ask them to remove the PMI. They must end the PMI when your balance reaches 78 percent of the value of the house.
How Much Will Private Mortgage Insurance Cost?
The average premium amount for PMI ranges from 0.58 to 1.86 percent of the original loan amount. This percentage comes out to about $30 to $70 each month for every $100,000 you borrow. There are some factors that determine how much in that range you will pay.
Loan-to-value (LTV) ratio is how much you put down for your home. For example, if you put 10 percent down, then you have a loan-to-value ratio of 90. If you put down 15 percent, then your loan-to-value ratio is 85 percent. The smaller your down payment means, the higher the risk the lender is taking, which means your PMI is also higher.
Your credit score and your credit history impact your PMI. For example, when you have a higher credit score and you are looking to purchase a house that is approximately $250,000 and 3.5 percent down, you can expect your payment to be about $1,164. However, if you have a lower credit score, the payee increases to $1,495.
Are There Different Types of PMI?
If you think you are going to need PMI, you have a number of options available to you.
These include:
Borrower Paid Mortgage Insurance
Offers premiums that are part of your monthly mortgage payment. These mortgage payments include interest, property taxes, and the principal balance. The appropriate amount is given to the insurer every month. This monthly premium shows up as a special line item.
Lender Paid Mortgage Insurance
Does not show up as a premium line item. However, you will have to pay a higher interest rate with the mortgage. You may also have to pay out more in origination fees.
Single Premium Mortgage Insurance
Does not divide the payments up into regular monthly installments. Instead, it bundles all of the insurance into one payment. As a result, you may be able to pay the balance in full at closing or add it to the amount of the loan, giving you a higher balance.
Split Premium Mortgage Insurance
Means you pay a higher fee upfront to cover some of the cost but also reduce the amount you have to pay each month.
FHA Mortgage Insurance
Is a type of mortgage insurance that you find with an FHA loan. This insurance has you pay a payment upfront and then annual payments. You will not be able to cancel this type of mortgage insurance.
FAQ
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There are three different ways that you can make PMI payments. The lender you are using may dictate the way that you can make your payments. First, you can make monthly payments along with your mortgage payment, which is the most common way to pay your PMI. This increases the amount you pay each month but allows you to spread out the premiums you pay. You can make your PMI payment for the year all at once. Then you make annual payments to cover the payments for the entire year. This allows your monthly payment to be lower, but you have a large annual fee.
Another option is a hybrid type of payment. This type of payment is to pay some of the money upfront and the rest each month. This can help to reduce your monthly payment while giving you some extra cash.
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There are a number of ways that you can have your PMI removed. First, you can build up equity in your home. When your mortgage loan balance reaches 78 percent of your original loan, the mortgage insurance servicer is required by law to stop your PMI. When you have as much as 20 percent equity in your home, you can contact the insurer and request that they cancel your PMI.
You can have your home appraised. It is possible that you have 20 percent equity in your home because the value of your home has increased. You must have a professional appraisal done. It should cost you about $350. Then, you can refinance your mortgage. This option also requires an appraisal. This process costs more than just an appraisal. It could lower your interest rate.
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In general, lenders that provide conventional mortgages require a down payment of at least 20 percent. If you do not have a 20 percent down payment, the lender may require you to have PMI. There are some exceptions. You could search for a conventional loan that is PMI-free. These lenders may be willing to waive the PMI if you have less than 20 percent to put down. However, these lenders may also increase your interest rate. There are some programs that do not require PMI, like VA loans.
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There are a few ways to avoid paying PMI. The best one is to ensure that you have a loan-to-value ratio that is 80 percent of the purchase price of the home. This loan-to-value means that you should have at least one-fifth of the cost of the house as a down payment. However, it may not be possible for you to have such a high down payment.
Another option is to get a piggyback mortgage. A piggyback mortgage means that you take out a second loan or a home equity loan on the house. An example of how this works is that you pay for 80 percent of the house with the first mortgage, 10 percent is from the second mortgage, and you cover the last 10 percent with your down payment. The last option is when the PMI is included in your mortgage over the life of the loan. With this option, you will end up paying more interest over the life of the loan, but you pay less each month.
Need More Help?
When you are considering buying a house, there is a lot to consider. PMI is just one of the details you should consider. If you want to avoid paying PMI on your house, you should consider saving a substantial amount of money first. The Goalry Mall is here for you to help you with all of your budgeting and house questions. We offer you a wealth of information available on our website. We have articles and videos, and you can even talk to experts about all your budget questions.
Creating a budget is the best way for you to save the money you want for a down payment for your new home. However, it can be difficult, too. In addition, the Goalry Mall has special spaces dedicated to budgeting and saving money. You do not have to figure it out alone. We have experts who can help. Our site helps you determine your budgeting goals and provides you with actionable steps to achieve those goals. The Budgetry Store can help you work towards your goal of saving 20 percent for a down payment.
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Conclusion
Buying a house is an important time in your life. You want to ensure that you know all the details and prepare yourself for what may happen when you apply for a mortgage. Knowing this information can help you be ready for every step of the mortgage process, including having enough money to put down on your house. You want to begin saving money before you look for a house.