What is private mortgage insurance (and how can I avoid it)?

When it comes to purchasing a home, the traditional belief was that a 20% down payment was necessary. However, saving up that much can be tough, especially for first-time homebuyers or anyone looking to enter today's housing market quickly. This is where private mortgage insurance (PMI) comes into play, offering an alternative for borrowers who don't have a sizable down payment. What is private mortgage insurance, and why should I care?

If you're like most Americans, you probably need to borrow money to buy a house. And if you're making a down payment of less than 20%, the lender needs to protect itself. Private mortgage insurance (PMI) is insurance that benefits the lender by protecting them in case you default on your future mortgage payments. But how do you, the prospective homebuyer, benefit from taking on private mortgage insurance?

By paying a monthly PMI premium, you can secure a mortgage and enter the housing market sooner than if you had to wait to save up for a full 20% down payment. It also can allow you to start building home equity and enjoy the benefits of homeownership immediately.

Understanding how PMI works

While PMI allows buyers to enter the housing market with a lower down payment, there is a downside. For a time, you'll have slightly higher monthly mortgage payments since you'll end up borrowing more initially. However, in most cases, PMI doesn't remain in effect for the entire loan term. Once your equity in the home reaches 20%, you can request to cancel PMI.

Before you fall in love with a home or settle on a home loan, it's important to speak with your loan officer about the PMI costs based on your unique financial situation. It’s equally important to understand the factors that determine how much you’ll pay for PMI.

Factors that affect PMI costs

What will your PMI cost? Your PMI payment is calculated based on several factors. On average, PMI costs between 0.5% to 2% of the loan amount per year. For example, if you borrow $450,000, at a PMI rate of 1%, you would pay $4,500 annually or about $375 per month. Keep in mind this is an estimate, and your actual cost will depend on your loan amount, PMI rate and other factors. To get a clearer idea of your own PMI cost, use our mortgage calculator to see how different loan amounts, interest rates and PMI rates might affect your monthly payments.

Common types of PMI

There are different types of private mortgage insurance. Choosing the right one for you depends on your personal goals and home-buying situation.

• Borrower-paid mortgage insurance (BPMI): You pay this premium as part of your monthly mortgage payment. Once you reach 20% equity, you can request to cancel BPMI.
• Lender-paid mortgage insurance (LPMI): The lender pays the PMI upfront, but you may have a slightly higher interest rate. LPMI is not cancellable.
• You pay a lump sum at closing to avoid monthly payments. Consider the effect on your cash reserves before choosing this option.

Note: Please check with your specific insurance provider for your personal situation. Additional costs and fees may apply.

Can you avoid paying PMI? The best way to avoid PMI is to make a 20% down payment. However, that’s not always feasible. Some government-backed loans, like FHA loans and VA loans, have built-in PMI or insurance premiums. If you opt for a loan with PMI, look for one with cancellable terms, so you can remove PMI once your equity reaches 20%.

To remove PMI, you’ll need to request it in writing, and your lender will have eligibility requirements, such as but not limited to:

• Staying current on your mortgage payments
• No payments being more than 30 days late in the last 12 months
• Meeting the applicable loan-to-value (LTV) ratio
• Another option is refinancing your loan, if you qualify, to eliminate PMI. Speak with your loan officer to determine which path is right for you.

Need More Info on PMI? Private mortgage insurance helps homebuyers secure a loan with a smaller down payment, but it’s important to understand the types, costs and alternatives. If you’re ready to learn more about PMI or explore your mortgage options, contact a Movement Mortgage loan officer today. Or, if you're ready to get started, you can always apply online now.

Note: Movement Mortgage is not affiliated, endorsed, or sponsored by the Department of Veterans Affairs or Federal Housing Administration or any other government agency.

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