When you get a mortgage you may be required to carry private mortgage insurance, or PMI.
Typically, PMI is 0.5%-1% of the total loan amount which is added onto the monthly mortgage payment.
There are some loans that don’t require PMI and if you have a large enough down payment you can avoid it.
Where going to take a deeper look into mortgage insurance, how it works, the costs, rates, and how to avoid PMI.
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What is PMI?
PMI stands for private mortgage insurance and is required on a conventional loan with a loan-to-value (LTV ratio) above 80%.
Mortgage insurance protects the lender issuing the loan in the event the borrower defaults on their payments and the is foreclosed on. The insurance company will pay the remaining balance of the loan and take possession of the property and list it for resell as a foreclosure home.
PMI rates vary depending on the type of home loan, LTV ratio, and the mortgage lender. But usually rates average between a half a percent to a full percentage point of the loan amount.
The premium will be added to the monthly payment and is required until the loan-to-value ratio reaches 78% of the original sales price.
Use our mortgage calculator to see what you can afford including PMI
Example of PMI
Let’s ay you’re buying a $200,000 home with an FHA loan. You put 3% down and finance the remains $193,000. Your MIP rate will be 0.85% of the loan amount, which you will pay an extra $164 added onto your monthly mortgage payment.
How to Avoid PMI
If you’re getting any type of Government backed loan, besides a VA loan, there’s no getting around mortgage insurance.
If you’re able to come up with a 20% down payment you can avoid paying PMI by getting a conventional mortgage loan.
Another creative way to avoid paying PMI is with a 80/10/10 loan. By getting two loans, one for 10% of the purchase price and another for 80% loan-to-value. You’re able to put up just a 10% down payment and not have to pay PMI.
A portfolio loan is offered by a real estate investor, bank, or credit union that plans on holding onto the loan to collect interest. Usually a mortgage company issues a loan then sells it to Fannie Mae or Freddie Mac.
But a portfolio loan doesn’t have to meet the same standards, so you may be able to put less than 20% down and avoid PMI by paying a slightly higher interest rate.
Benefits of PMI
It’s hard to imagine that an additional monthly fee can be a good thing, but it actually is. Without mortgage insurance guaranteeing the lender will be paid even if the borrower goes through foreclosure you wouldn’t get a mortgage with anything less than 20%.
In the days before PMI a conventional loan was not available to homebuyers who didn’t have great credit and a 20% down payment. The guidelines are now more relaxed allow for lower credit scores and down payments as low as 3%. Making it easier for first-time homebuyers to qualify for a loan.
Mortgage Insurance and FHA Loans
The Federal Housing Administration created the FHA loan program to help make it easier for first-time buyers to become homeowners. The FHA does not issue the loans, they act as an insurance policy insuring the loans if the borrowers defaults.
To fund the FHA program buyers are required to pay a mortgage insurance premium, MIP, monthly. And an up-front mortgage insurance premium of 1.75% of the sales price of the home.
The mortgage insurance premiums for FHA loans varies depending on the down payment amount.
FHA changed the mortgage insurance rules in 2015 requiring borrowers to carry MIP for the life of the loan. The only except ion to this is borrower who used at least a 10% down payment, mortgage insurance premiums will be required for the first 11 years of the mortgage.
PMI Rates for Each Type of Loan
- Conventional loans – 0.50%-0.65% – The rates from private lenders will vary depending on the situation.
- FHA Loans – 0.45%-1.05% – FHA MIP is between 0.45%-1.05% depending on the down payment and the loan term.
- USDA Loans – 0.35% – USDA mortgage insurance rates are the lowest of any type of loan
- VA Loans – No PMI needed – VA loans are the only type of mortgage loan that doesn’t require mortgage insurance.
How to Get Rid of PMI
If you have a conventional loan PMI will be removed automatically when the loan-to-value reaches 78%. If it doesn’t, you may need to contact your lender to have them remove it.
As is the case with FHA loans, unless you use a 10% down payment mortgage insurance will never be removed. However, you can refinance your FHA loan in to a conventional loan when the LTV ratio reaches 78% so you will not be required to have PMI.
How PMI Affects What You’re Approved For
PMI is added into your monthly payment and is factored into your debt-to-income ratio. By not having 20% down and needing to carry PMI you’ll not be approved for as large of a loan. Other expenses are also factored into your DTI ratio such as property taxes and homeowners insurance.
When determining your budget for a home you must include all of the monthly costs involved.
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