Understanding Private Mortgage Insurance (PMI)

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Buying a home can be a complicated and confusing process – especially when it comes to understanding the insider lingo and jargon. One term that new homebuyers will likely hear thrown around is PMI, or Private Mortgage Insurance.

When it comes time to purchase a home, ideally buyers will make a 20% down payment. If a homebuyer is unable or unwilling to make the 20% down payment, the lender will require the borrower to take out PMI to ensure that the lending company is covered in the event the borrower fails to make their monthly mortgage payments. Additionally, if you are borrowing over 80% Loan-To-Value (LTV) on a conventional loan or are securing a Federal Housing Administration (FHA) loan, you are required to pay for PMI.

At first glance, PMI sounds like something every new homeowner should invest in. Who wouldn’t want to insure their mortgage? While this is a logical assumption, it is important to remember that PMI protects the lender - not you - if you stop making your mortgage payments. PMI is arranged by the lender through third party private insurance companies. There are a few different ways to pay for mortgage insurance, but the most common practice is with a monthly premium. In this instance, the premium amount is added to the homeowner’s monthly mortgage payment.

PMI can be a great tool, making it possible for people to secure a mortgage who may otherwise not qualify. However, PMI does add additional costs to your overall monthly mortgage bill. If you are paying for Private Mortgage Insurance, you should expect to pay around $40 - $50 each month per $100,000 borrowed on the home. Because of the additional costs, homeowners may want to look into ways of eliminating their PMI payments.

If you are paying for Private Mortgage Insurance and are hoping to save some money by eliminating those payments, you’re in luck! We have pulled together some of the most common ways to get rid of PMI.

Pay Down your Mortgage: After paying down your mortgage to 80% of the purchase price or less on a conventional loan, you will be able to request that the lender remove PMI from your mortgage. It may take several years if you are making the minimum mortgage payment. If you are financially able, it may be a good idea to make extra mortgage payments in hopes of getting you there sooner.

Refinance your Mortgage: You can request to have an appraisal done to show the value of your home has risen. After the appraisal, you will be able to refinance the loan to an amount at or under 80% LTV on a conventional loan, thereby eliminating the PMI payment. Additionally, refinancing may help you get a lower interest rate and reduce your monthly payment.

Pay your Mortgage Down to 78% of the purchase price: At this point, the servicer is required to drop the PMI coverage automatically.

Refinance out of an FHA loan: By refinancing from an FHA loan to a conventional loan under 80% LTV, you will have the option to request that the lender remove PMI from your mortgage. It is important to remember that no matter how much you have paid on an FHA loan, you will always have to pay PMI because of the loan type.

Though you may be dreaming of the day you can get rid of PMI, it is important to do the research to make sure this makes sense for you and your situation. Contact us anytime at 800.664.3828 to learn more about PMI or to discover what mortgage loan option may be right for you.

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