How to Obtain Private Mortgage Insurance (PMI)
How to Obtain Private Mortgage Insurance (PMI) is generally required by lenders in situations where purchasers can’t afford to make down payments totaling 20% or greater on a regular loan. PMI protects the lender in case the purchaser defaults on his or her mortgage. While an added expense, PMI can be an essential support to purchasers who seriously wish to acquire a residence yet can’t afford to make an extensive down payment.
Here is an in-depth guide to getting PMI where it is required and navigating through it.
The process is relatively straightforward:
What is private mortgage insurance (PMI)?
PMI is an insurance policy that protects the lender in the event of foreclosure. If you’re putting down payments of less than 20% on your home, your lender is most likely to expect you to have to pay PMI. It is typically included in your regular payment and is calculated in proportion to the amount borrowed.
It does not insure you, the borrower, but does permit lenders to take on more risk in order to finance you in return for getting a down payment that is not as extensive.
How to Get Private Mortgage Insurance Do You Need PMI?
PMI is required in most cases if you’re taking an ordinary loan and paying down payments of less than 20%. Find out from your lender whether PMI is needed to obtain your mortgage loan.
Shop around for Lenders Depending on who you get money from, different lenders have different rates of PMI, so shop around to get the lowest. Furthermore, some lenders have “lender-paid PMI” (LPMI), where the lender pays the insurance but adds it to your interest rate in your mortgage, which can be higher.
The choices in PMI can be categorized in various ways:
Monthly PMI: This is most often where you pay both your regular payment and premium each month.
Upfront PMI: This is paying in full upfront at closing for the premium on PMI.
Split premium MI: Combination of upfront premium and regular monthly premiums.
Provide Necessary Documents You’ll need to present your lender with finance documents in order to obtain a mortgage and PMI.
This typically includes:
Proof of income
Credit score
Employment verification
Debt-to-income ratio
Sign the PMI Agreement Once your documents have been verified by the lender, they’ll notify you regarding the amount and payment plan of the PMI. Upon agreeing to the terms, you’ll have to sign an agreement to acquire PMI, which is part of your mortgage loan.
Pay PMI until reaching 20% Equity When you’ve accumulated 20% equity in your home (from payments plus value appreciation in the home), you can get your PMI waived, although this is lender and loan type specific.
How expensive is PMI?
The cost of PMI depends upon various factors:
The lower your down payment (the higher the LTV), the higher your PMI premium.
Larger loan amounts tend to result in higher PMI premiums.
Credit Rating: An improved credit rating can result in a reduced PMI premium.
Type of PMI: Monthly PMI is typically between 0.3% and 1.5% annually of the original loan amount. If your original loan is $200,000, expect to pay between $600 and $3,000 annually in PMI.
When Can You Remove PMI?
You have several choices to remove PMI from your loan:
Automatic Expiration: As mandated by statute, PMI automatically terminates upon reaching an outstanding loan balance equivalent to 78% of the original home value.
Request cancellation: When you have equity in your home to 20%, you can ask to cancel PMI. Your lender typically will ask for an official appraisal to establish the value of your home.
Refinancing: Refinancing is an additional option where you can opt to refinance your mortgage to achieve 20% equity in order to eliminate PMI.
Advantages and Disadvantages of PMI Advantages
Enables Homeownership with Low Down Payment: Homeownership is now accessible to you through PMI with a down payment below 20% to achieve homeownership sooner.
Flexible Options: PMI can be in various forms to have options in paying for it.
Disadv
Adds to Your Monthly Costs: PMI can add a significant amount to your monthly mortgage payment, making it more expensive to own your home.
No Value to You: PMI is protecting the lender, not you, so you’re paying for something that has no direct value to you.
FAQs
1. How is PMI different from FHA insurance?
PMI is typically applied to conventional loans, whereas FHA loans have mandatory mortgage insurance premiums (MIP) attached to them. MIP is typically more expensive and is not always cancelable, whereas PMI can be canceled upon achievement of 20% equity.
2. Can I avoid paying PMI with a down payment of less than 20%?
Yes! One way is to obtain a “piggyback loan,” where you take out a second mortgage to fund part of the down payment. This can prevent paying PMI but can have higher rates on the second loan.
3. How to cancel PMI?
In order to cancel PMI, you’ll typically have to gain 20% equity in your home. When you’ve passed this threshold, you can apply to have it canceled, although some lenders can request an appraisal to confirm your residence value.
4. Can PMI be written off in taxes?
PMI was deductible in limited situations in previous years, but only temporarily. Always have an accountant check to determine if you’re eligible.
5. What happens if I don’t pay PMI?
Your lender can take action against you by adding the unpaid amount to your mortgage balance, which can result in penalties later on and can have an effect upon your credit rating.
Conclusion
Private Mortgage Insurance (PMI) is a necessary option for those who cannot afford to put down a 20% down payment. Though it can be an added expense, it helps you purchase a home earlier. Knowing about the types of PMI, the amount paid, and the cancellation process can guide your decisions regarding your homeownership process and mortgage.
