May 2nd, 2023 8:23 PM by Austin Howland
What is Private Mortgage Insurance aka PMI?
Private mortgage insurance, commonly known as PMI, is a type of insurance that protects lenders in case a borrower defaults on their mortgage payments. It's typically required by lenders when a borrower makes a down payment of less than 20% of the home's purchase price. PMI provides an additional layer of security for the lender, as it covers a portion of the loan amount if the borrower fails to make their mortgage payments.
Why is PMI Required?
Lenders require PMI for borrowers with less than a 20% down payment because a lower down payment represents a higher risk to the lender. With less equity in the home, borrowers may be more likely to default on their mortgage payments. PMI helps mitigate that risk for lenders by providing financial protection.
How Much Does PMI Cost?
The cost of PMI varies based on several factors, including the borrower's credit score, the loan-to-value ratio, and the size of the down payment. Typically, PMI rates are calculated as a percentage of the loan amount and can range from 0.3% to 1.5% of the original loan amount per year.
How to Remove PMI
PMI is not permanent. Once the borrower's equity in the home reaches 20%, PMI can be cancelled. Some lenders may require the borrower to submit a request to remove PMI, while others will automatically cancel it. It's important to check with your lender to understand their specific requirements for PMI removal.
Benefits of PMI
PMI can be a valuable option for homebuyers who don't have a large down payment saved up but still want to purchase a home. Some benefits of PMI include:
1. Lower Down Payment: PMI allows borrowers to obtain a mortgage with a lower down payment, which can make homeownership more accessible, especially for first-time homebuyers.
2. Faster Homeownership: With PMI, borrowers may be able to buy a home sooner, as they don't need to wait until they have a 20% down payment saved up.
3. Flexibility: PMI offers flexibility in terms of payment options. It can be paid as a separate premium, or it can be rolled into the monthly mortgage payment, making it easier for borrowers to budget for their housing costs.
Considerations for PMI
While PMI can be beneficial for some homebuyers, it's important to consider a few things:
1. Cost of PMI: PMI rates can add to the overall cost of the mortgage. It's important to understand the cost of PMI and how it will impact your monthly budget.
2. Requirements for PMI Removal: While PMI can be cancelled once the borrower's equity in the home reaches 20%, there may be other requirements set by the lender, such as having a good payment history and meeting certain criteria. It's important to understand these requirements and plan accordingly.
3. Alternatives to PMI: There may be other options to avoid PMI, such as obtaining a loan with a higher interest rate (known as lender-paid PMI) or getting a second mortgage to cover part of the down payment. It's important to explore all options and work with a knowledgeable mortgage professional to determine the best strategy for your specific situation.
Conclusion
In conclusion, PMI can be a useful tool for homebuyers who don't have a large down payment saved up but still want to purchase a home. It's important to understand the cost of PMI, the requirements for PMI removal, and the alternatives available. Working with a knowledgeable mortgage professional can help you navigate the world of PMI and find the best mortgage solution for your needs and budget.
At Contemporary Mortgage Services, Inc., we understand that navigating the world of PMI can be overwhelming for homebuyers. Our experienced mortgage brokers are here to help. We can explain the ins and outs of PMI, answer your questions, and help you find the best mortgage solution for your needs and budget. Contact us today to learn more.
Contemporary Mortgage Services, Inc.
407-834-3377
info@contemporarymortgage.com