As you look to purchase your new home, you are going to see one of the costs of borrowing money will be mortgage insurance, or private mortgage insurance (PMI) Most likely, this will occur due to your amount of down payment and the interest rate on your mortgage. Let’s take a look.
Benefits of Mortgage Insurance
- Flexible premium payment options (your lender may have numerous options available)
- Premium Payments are temporary – PMI can be cancelled once your home reaches an 80% loan to value ratio
- Ability to buy your home sooner with as little as 3% down payment (this will depend on other factors)
FAQ’s about Mortgage Insurance
How much does PM cost?
The amount will vary based on your loan terms. You need less PMI with 15% down payment than you do with a 3% down payment. And it depends on the type of mortgage and other factors. Your TEAM Lender can provide you with specific payment amounts.
Won’t PMI Increase my mortgage payment?
While there is an added cost to PMI, it’s a small percentage of your overall mortgage payment. Most of it will be determined by your interest rate, and the loan amount.
Do I pay PMI for the entire time I have a Mortgage?
Thankfully, no! YOu can request to have PMI removed from your mortgage when your loan balance hits 80% of your original appraised value. Additionally, the FHPA (Federal Homeowners Protection Act) requires that mortgage insurance be automatically cancelled when your balance reaches 78%. This law may or may not apply to your mortgage….and you will want to discuss this with your lender.
At your closing (we like to call it a Celebration!) your lender must provide you with information about the mortgage insurance on the loan, and the conditions when you can cancel it. Furthermore, each year after you close, your lender must send you a reminder about PMI and that you can make that cancellation request once the conditions have been met.
Why do Lenders need Protection?
One need not look any further than the housing crash for this answer! But, to be more specific, it protects your mortgage company or bank if you are unable to continue making mortgage payments.
Studies have shown that homeowners with less than 20% invested in a home are more likely to default. It makes a loan with a lower down payment a higher risk. This should not be read that ALL home buyers with less than 20% are going to be a problem!! But you know how statistics work……not always in your favor. And you should not let this deter you from buying a home. MANY buyers buy with less than 20% as a down payment.
How Do I Pay PMI?
It is usually a part of your monthly payment, but can be paid in a single premium and financed as part of your mortgage. Again, your TEAM Lender can answer these questions, based on your specific situation.
The Consumer Financial Protection Bureau has more information about Mortgage Insurance HERE.
And one of our TEAM Lenders, Movement Mortgage has a great article HERE.
Every Buyer and their situation, and every mortgage can be different. This is why we strongly encourage you to meet with a lender early on in your home search process to know what your specific situation is. Your lender can look at numerous options for you, and even suggest ways to lower these amounts.
We always say that it is OUR job to help you find the right home at the best possible price and terms, but it is your LENDER that helps you pay for it.