When you purchase a mortgage loan, it’s common for homebuyers to pay for Private mortgage insurance (PMI). This mortgage insurance is commonly needed when you are unable to make a down payment of 20% of the property’s value or more.
PMI is provided by government agencies like Freddie Mac and Fannie Mae, and private insurance companies. The borrower of the property has to pay the premiums of the insurance, as a trade off for the lender accepting a relatively more risky loan. PMI is a form of protection to the lender of the home as it reimburses them in case the borrower defaults the loan.
FHA (Federal Housing Administration) loans require mortgage insurance however it’s not PMI but MIP (mortgage insurance premium). All FHA borrowers must pay MIP to insure the investor against loss if the homeowner defaults on the mortgage. While there are ways to avoid PMI with conventional loans, there is no way to avoid MIP on FHA loans because the minimum down payment is only 3.5%.
Let’s dive deeper
There are several things you should keep in mind about PMI. As mortgage insurance, it can help you get a bigger loan and afford your dream home – even if it is more expensive. This type of insurance, however, will increase how much you pay for a home over the lifetime of your loan.
If you are not able to put 20% down, but are willing to avoid the PMI, you may ask the lender for a loan with a lower down payment. This way you will not be required to pay for PMI, but the interest rate for your loan is going to be higher. The financial difference between the higher interest and the PMI depends on various factors. Each choice can affect your taxes in a different way, again depending on the size of your down payment, your credit score, the general market situation and conditions.
How does PMI affect your monthly mortgage payment?
Depending on the lender, you can pay for your PMI in a few different ways. It is important to speak with your lender about the options they offer and choose the most suitable one for you.
PMI premium payments are usually done monthly. They are simply added to the sum you pay for your mortgage. People can see the value of the PMI premium in the Loan Estimate or the Closing Disclosure.
Sometimes borrowers can also pay upfront for the PMI, covering the whole premium at once when closing the deal. The downside in this case is that the paid premium might not be refunded, should the borrower decide to refinance the loan or move out of the property.
Another way for people to pay for their PMI is to combine monthly premiums with a certain upfront payment. It is a good idea to consult with professionals and ask them to calculate the costs in the different options, if your lender allows you to choose how to do the PMI premium payments.
PMI cancellation
PMI has to be cancelled by the lender once the unpaid part of the loan reaches 78 percent or less of the property’s purchasing value. This usually happens a few years after the closing of the deal. Keeping track of your mortgage payments will help you ask the lender for PMI cancellation soon after the loan-to-value proportion declines to 80%. Make sure you talk to the lender about their cancellation policy so you pay as little PMI as possible.
This guest post is written by Ella Andrews. Article granted by Andrews on behalf of Man With A Van removals.
