logo
logo
Sign in

What Is PMI And All About It

avatar
Compare Closing LLC

If while purchasing a home your down payment is less than 20% you may have to pay extra for an insurance policy.

WHAT IS PMI AND HOW DOES IT WORK?

Any conventional mortgages with smaller down payments require a PMI and help first-time buyers to become homeowners.

Lenders who offer lower down payment financing options are protected by PMI.

The lenders consider you a riskier borrower with a greater chance of defaulting on your mortgage when the downpayment is less than the traditional 20%.

If the default happens, the lender could use the escrowed PMI payments to recover some of their loss.

HOW MUCH DOES A PMI COST?

If the loan amount is $250,000 with a 5% down payment, PMI would add between $1,188 and $3,563 per year or approximately $100 to $300 on your monthly mortgage payment.

The monthly or yearly payment of PMI varies by the lender. Some may allow you to make a partial upfront payment at closing so that it lowers your monthly or annual PMI payments.

WAYS TO LOCK IN A LOW PMI RATE

 
  • Higher credit score.
  • Close to a 20% down payment.
  • Owner-occupied property rather than rental or investment properties.

WHEN CAN YOU STOP PAYING PMI?

Some lenders might include making a set number of mortgage payments, or getting a new appraisal, or owing less than 80% of your loan principal as an obligation before stopping PMI.

Once you have reached the 80% loan-to-value threshold you can request a PMI cancellation in writing. The specific requirements as laid out by the Consumer Financial Protection Bureau, are:

  • A record of good payment history
  • No default in current loan status
  • There should not be a subordinate loan in equity.
  • Proof of value to be submitted through an appraisal.

Borrowers with Fannie Mae or Freddie Mac mortgage have a different threshold, the equity must be at least 25% before PMI can be terminated.

THE ADVANTAGES OF PMI

 
  • You can buy a home sooner without the tradition of 20% down.
  • You’re able to build wealth sooner and increase your net worth.
  • It’s only a temporary cost till an 80% LTV ratio

If you file an itemized tax return then PMI is tax-deductible

THE DISADVANTAGES OF PMI

 
  • It’s an extra expense each month.
  • PMI rates may be high depending on your credit score, home occupancy, down payment amount, and equity appreciation. Resulting in raising your monthly mortgage payment.

Canceling PMI needs a formal request in writing, which takes time to process and remove.

DO ALL HOME LOANS REQUIRE PMI?

  • Conventional mortgages: If you paid less than 20% down on a conventional loan, expect to pay PMI.
  • FHA loans: Can borrow with as little as 3.5% down but has a monthly insurance premium or MIP. All MIP requires advance payment at closing followed by regular monthly or annual payments.
  • USDA loans: Even if it does not require a down payment, there is a mortgage insurance requirement and upfront and annual fees.
  • VA loans: There is no mortgage insurance requirement with this loan, but a one-time origination fee between 1.4 and 3.6%, depending on the down payment amount to be paid along the loan amount.

ARM loans: An ARM, or adjustable-rate mortgage, may also include PMI, but you may be able to build equity faster, so you can get rid of PMI faster than with a fixed-rate mortgage.

Reference Source: Cnet

https://www.compareclosing.com/mortgagenews/what-is-pmi-and-all-about-it/

collect
0
avatar
Compare Closing LLC
guide
Zupyak is the world’s largest content marketing community, with over 400 000 members and 3 million articles. Explore and get your content discovered.
Read more