One of the most asked questions, especially from 1st time homebuyers, concerns mortgage insurance. Typically buyers want to understand what it is, exactly, why they need it, and do they have to pay it for the entire term of their home loan.
So… what exactly is mortgage insurance, aka private mortgage insurance or PMI?
PMI is insurance that protects the mortgage lender against default on the note by the borrower. As the borrower, you pay the PMI premium, and your lender is the beneficiary of the policy ensuring that if you stop paying your mortgage, the lender is paid by the insurance company.
Who needs PMI?
You do, if your down payment is less than 20 percent of the appraised value or sale price, you will be required to buy mortgage insurance
How much does it add to your payment each month?
Well that varies depending on the size of your down payment, the loan amount, your credit score and the loan program, but you can generally figure on paying between .4% and 1.5% of the loan amount annually. To determine the monthly amount, divide that number by 12.
How long do you have to pay for PMI?
This answer, once again, varies. It depends on how your mortgage is worded, and some lenders offer programs that allow you to pay the entire insurance premium in a lump sum at closing. But generally if you have a conventional mortgage, you’ll pay for a minimum of the first year of your loan. Once you pay down the balance of your mortgage below 80% of the original purchase price or value, and you’re current on payments, you can request that your lender remove the insurance. You will generally need to have your home re-appraised, which in some cases a change in value will help you meet the equity requirement and get your PMI removed. Once your equity ratio reaches 78% as scheduled, the HPA act requires lenders to remove your PMI under specific rules. FHA loans require you to pay mortgage insurance for at least the first five years, and in order to have it removed, your loan balance must be down to 80% of the original purchase price or value – a new appraisal will not be accepted.
How can you avoid taking out PMI?
Well there are some options, if you qualify or can manage it. Veteran can apply for VA loans, which has no private mortgage insurance. USDA loans have mortgage insurance but at reduced rates. Another option… put down more than 20% as a down payment. Sometimes taking a higher interest rate will eliminate the PMI requirement (lender paid PMI), just do the math to figure out if this option will help your bottom line payment each month. See if you’ll qualify for a combination loan (80/10/10) which includes an 80% first mortgage, 10% down payment, and 10% as a second mortgage. Some banks or lenders offer special loans for certain occupations which may not require PMI. It doesn’t ever hurt to ask!
Bottom line, what’s in it for me?
PMI enables borrowers with less cash to have a greater opportunity to buy a home. Because of PMI, you could potentially purchase a home with as little as a 3-5% down payment.
The Homeowners Protection Act of 1998, or “PMI Cancellation Act”, signed into law by President Bill Clinton protects homeowners rights with regards to mortgage insurance – you can read more about the law here – http://www.federalreserve.gov/boarddocs/caletters/2004/0405/CA04-5Attach1.pdf
The Mortgage Guys welcome your questions regarding your Atlanta home purchase, home mortgage, or refinance. Contact us today!