What is Private Mortgage Insurance
Understanding Private Mortgage Insurance, PMI
Private mortgage insurance, or PMI, is a borrower paid mortgage insurance policy that protects the mortgage lender when the loan amount exceeds 80 percent of the homes value. Private mortgage insurance only applies to conventional mortgage loans.
Private mortgage insurance is required on all conventional mortgage loans where the loan-to-value is greater than 80 percent.
The annual premium for private mortgage insurance is divided by 12 months and added to the borrower's new monthly payment. Once a conventional loan balance drops below 78 percent loan-to-value, the private mortgage insurance policy will be cancelled and the borrowers payment will be decreased.
This article will discuss private mortgage insurance, its benefits, drawbacks, and how to remove it from your monthly mortgage payments.
Private Mortgage Insurance: Definitions and Basics
Conventional mortgage loans are loans that are not insured by the Government. Therefore, conventional loans will require PMI is an insurance policy that protects the mortgage lender's risks when the down payment or equity on a home is less than 20%.
This private mortgage insurance policy protects the lender in the event of payment default and losses occur for the first 20% of total loan losses.
PMI enables lenders to make mortgages available to people who cannot afford a significant down payment. It is mandatory when the borrower provides a down payment of less than 20% of the home's purchase price.
In general, the cost of PMI ranges from 0.3% to 1.5% of the original loan amount. PMI premiums can cost thousands of dollars annually and are usually paid monthly with the mortgage payment.
The amount of PMI the borrower, pays depends on the amount for the down-payment, the loan amount, and the borrower's credit score, type of transaction and type of home being purchased or refinanced..
PMI is not to be confused with another type of mortgage insurance, MIP. Mortgages insured by the Federal Housing Administration (FHA) require MIP, or mortgage insurance premiums, a similar kind of insurance program used to protect lenders in the event of borrower default.
Benefits of PMI Mortgage
In most cases, borrowers with higher credit scores will find conventional mortgage loans the most affordable loan program even when you include the cost of private mortgage insurance.
The main benefit of PMI is that is not permanent. When the borrower's loan balance falls below 78 percent loan to value, based on the last appraisal or sales price, the mortgage insurance will be removed.
Unlike Government Sponsored loan programs like FHA, VA, USDA conventional mortgage loans do not have any upfront funding fees which range between 1-3.6% on Government loan programs.
PMI is beneficial for borrowers who cannot afford a significant down payments when buying homes. It enables them to purchase a home and start building equity sooner than if required to save up a larger down payment.
Another significant advantage of private mortgage insurance is that it allows borrowers to become homeowners more quickly. In many cases, it takes several years for borrowers to save enough money for a 20% down payment on even a modest home.
By putting down a smaller down payment, homeowners can build equity faster, which can be helpful when it comes time to sell or refinance the property.
Drawbacks of PMI Mortgage
While PMI has its benefits, it also has some minor drawbacks. The main drawback is that the PMI policy and premium will not be removed when your home value increases year over year.
To remove the private mortgage insurance, the loan balance must be equal to or less than 78 percent of the original purchase price or last appraised value.
The only other drawback, compared to having 20% equity or down payment is that the cost of PMI added to the borrowers monthly payment.
This means homeowners often feel trapped and unable to remove mortgage insurance from their payments until their loan balance reaches 78% loan-to-value.
How do Homeowners Remove Private Mortgage Insurance, PMI from their Monthly Home Mortgage Payments
There are several ways to remove PMI from your monthly mortgage payments. The first is by securing a loan-to-value ratio of 80%. Then the lender is legally required to remove PMI charges.
The second way to remove PMI from monthly mortgage payments is by refinancing your mortgage, when the home value has increased and or pay down the principal loan balance to under 78 percent.
The borrowers will have to have enough equity in the home. This will enable them to remove PMI from their monthly payments
In conclusion of PMI:
Private Mortgage Insurance, PMI, is a type of insurance that enables borrowers to obtain a mortgage with a smaller down payment. While PMI can help homeowners build equity faster and purchase a home sooner, it also has drawbacks.
PMI payments add to the cost of homeownership. They are often mandatory, making it difficult for homeowners to remove PMI from their monthly payments.
However, with some patience and understanding, homeowners can eventually remove PMI from their monthly mortgage payments and enjoy home equity.
Our expert mortgage officers are available to assist with any questions you may have.
Please call us at 1-866-713-9292 or apply online.
