No Private Mortgage Insurance (PMI) FAQ’s
What is Private Mortgage Insurance (PMI)?
Private mortgage insurance (PMI) is additional insurance that lenders charge to protect themselves when a homebuyer cannot pay 20% down. Private Mortgage Insurance (PMI) protects lenders in the case of default but does not provide any benefit to the homebuyer.
Why do I have to pay for private mortgage insurance?
Lenders like to protect themselves in the case of default. That’s why lenders check the credit history, employment status, and background of borrowers. This is also why most lenders want borrowers to pay 20% or more of a home’s value upfront. For borrowers hoping to finance a house purchase with a conventional loan that cannot pay 20% down, lenders require mortgage insurance. This mortgage insurance compensates the lender for taking on higher risk until the borrower pays off 20% of the home’s value.
For example, a borrower who wants to purchase a $250,000 home, but only has $25,000 (10% of the home’s value) saved for a down payment will be charged PMI until their equity in the home reaches $50,000.
What are the different types of mortgage insurance?
Mortgage insurance comes in two types: mortgage insurance premiums (MPI) and private mortgage insurance (PMI). As the name suggests, private mortgage insurance (PMI) is a tool applied to conventional loans lent by the private sector. In contrast, a mortgage insurance premium is a tool applied to government-sponsored loans, such as FHA loans. PMI and MPI are managed differently and have separate rules.
How much does private mortgage insurance (PMI) cost?
The amount of private mortgage insurance (PMI) required varies by both the lender and the borrower. Private mortgage insurance (PMI) increases as your credit score and down payment amount decrease. However, private mortgage insurance (PMI) generally costs between $30 – $70 per month for every $100,000 borrowed.
For instance, if the borrower ends up purchasing the $250,000 home and pays $10,000 down, they will have to pay between $75 and $175 per month for PMI in addition to their mortgage payment until they build up $50,000 in equity in their home.
How do I pay the private mortgage insurance (PMI)?
While terms of payment can vary based on your lender, most often PMI will be paid monthly along with the mortgage payment. This type of payment is referred to as ‘Borrower-Paid PMI’. Lenders may also ‘pay’ the PMI requirement in exchange for an increase of the loan’s interest rate. However, we do not recommend this option to our customers because Lender Paid PMI increases your mortgage payment for the life of the loan, while other PMI options stop after you achieve 20% equity in your home.
When can I cancel my private mortgage insurance (PMI)?
The Federal Homeowners Protection Act requires a lender to remove mortgage insurance when the balance on your mortgage reaches 80% of your home’s original value or current appraised value. In order to cancel your PMI, you should contact your lender to request the PMI be canceled. Please note: You must have a good payment history with respect to the mortgage; mortgage payments must be current and there can be no other loans against the home.
Will my lender cancel my mortgage insurance when my house rises in value?
Not necessarily – your lender is obligated to cancel your mortgage insurance when the mortgage balance reaches 78% of the home’s original value. If your house has risen in value, you need to contact your lender and prove to them (with an appraisal) that your home has increased in value. The lender will not take these steps automatically; you will need to contact them if you can show that your house has increased in value.
Is paying for private mortgage insurance ever a good idea?
In most cases, paying for PMI is not a good idea. With that said, getting a loan with mortgage insurance can be a good idea if the homes in your area are rapidly appreciating. Under federal law, lenders are required to remove mortgage insurance from your loan when you have 20% equity in your home. All you have to do is get a new appraisal that shows that your house has appreciated (e.g. you now have more than 20% equity in your home) and the lender is required to remove the mortgage insurance from your payment. Obtaining a loan with mortgage insurance can also make sense when you plan to stay in your home for a very short period of time. If you plan to live in your home for a very short period, usually less than a year, then it may not make sense to obtain a second loan as the closing costs associated with the second loan may not outweigh the monthly cost of paying for mortgage insurance.
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