Understanding Private Mortgage Insurance
From the logistics of moving to securing a mortgage and so much more, homebuying can be a stressful, complicated process. The last thing a new homebuyer wants is the surprise of an unexpected expense. One such concern faced by millions of homebuyers each year is Private Mortgage Insurance, or PMI. If you are unfamiliar with this term, let’s take a moment to discuss PMI and how it could come into play during your mortgage process.
For homebuyers who have less than 20% of the cost of their mortgage to put toward their down payment, PMI will be required. The purpose of PMI is to ensure that your mortgage lender is covered if you default on your home loan. As the borrower, you pay the premiums on PMI and the lender is the beneficiary. PMI payments vary on a case-by-case basis, but typically fall between $30 and $70 per month for every $100,000 borrowed.
PMI works like a monthly fee that gets rolled into your mortgage payment. Though this adds to a homebuyer’s monthly expenses, it also allows you to buy your home now and start building equity rather than waiting years to save enough for a down payment.
PMI can sometimes be required to refinance a home loan. If there is not at least 20% equity in the home, a lender will require you to obtain PMI when you refinance.
The good news about PMI is that it doesn’t last forever. There are several ways to lose the insurance before the end of your mortgage. Under the HPA, your lender will be required to drop your PMI when your mortgage balance reaches 78 percent of the original purchase price, assuming you haven’t missed any payments and are still in good standing. Lenders are also required to stop PMI at the halfway point of your amortization schedule (i.e., year 15 on a 30-year loan). You can also refinance to eliminate PMI once you have achieved 20% equity.
At first glance, PMI can seem burdensome. In many cases, it can be a valuable tool to allow qualified homeowners to enter into a mortgage now and begin reaching their financial goals. If you still have questions about PMI or anything relating to the mortgage process, we are here to help. Please contact us today!
