To PMI or Not to PMI

Real Estate News

To PMI or Not to PMI

Written By: Jaymi Naciri
Monday, November 05, 2018

So, what is PMI anyway?

Call it an insurance policy that protects your lender against the possibility that you could default on your loan. ldquo;One of the risk measures that lenders use in underwriting a mortgage is the mortgages loan-to-value LTV ratio,rdquo; said Investopedia. ldquo;This is a simple calculation made by dividing the amount of the loan by the value of the home. The higher the LTV ratio, the higher the risk profile of the mortgage. Most mortgages with an LTV ratio greater than 80 require that private mortgage insurance PMI be paid by the borrower. Thats because a borrower who owns less than 20 of the propertys value is considered to be more likely to default on a loan.rdquo;

Why do I need it?

Coming up with 20 for a down payment obviously isnrsquo;t easy. ldquo;Many first-time homebuyers dont have that kind of money sitting around,rdquo; Randall Yates, founder and president of The Lenders Network, told us. So, PMI can spell the difference between being able to buy a home, and notmdash;even if it costs you a couple hundred dollars a month.

How much will it cost me?

You can expect to pay between 30ndash;70 for every 100,000 that you borrowed to purchase your home every month. Unisonrsquo;s estimated monthly payments based on the example of a ldquo;30-year loan for 250,000 with an interest rate of 4 percentrdquo; breaks down as:

bull; Principal and interest: 1,194
bull; Property taxes: 100
bull; Homeowners insurance: 80
bull; PMI: 125

Do I have to pay PMI no matter what?

Not necessarily. ldquo;There are a couple alternatives that may work for some buyers,rdquo; said Yates. ldquo;If youre a veteran, youre in luck because VA loans are the only type of home loan that doesnt require PMI. A piggy-back mortgage or 80/10/10 is another option some buyers use if they do not have the full 20 down payment. The borrower puts 10 down and gets a second loan for the other half of the down payment. In this scenario, you would have two loans to repay, but you avoid paying PMI. If youre in a rural area, you could qualify for a USDA loan. USDA loans are a type of government-backed mortgage that does not require a down payment and has a very low PMI rate of just 0.35 of the loan amount.rdquo;

Can I ever get rid of PMI?

You can, but itrsquo;s not easy. ldquo;To remove PMI, or private mortgage insurance, you must have at least 20 percent equity in the home. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80 percent of the homersquo;s original appraised value,rdquo; said Bankrate. ldquo;When the balance drops to 78 percent, the mortgage servicer is required to eliminate PMI. Although you can cancel private mortgage insurance, you cannot cancel Federal Housing Administration insurance. You can get rid of FHA insurance by refinancing into a non-FHA-insured loan.rdquo;

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