By now you’ve likely heard complaints or frustrations over PMI (Private Mortgage Insurance) and do whatever you can to avoid it.
What if it’s not as bad as you think, though?
Private Mortgage Insurance has its positive sides, including the fact that it allows you to get competitive financing without a 20% down payment.
Here’s everything you need to know about PMI.
Private Mortgage Insurance is insurance coverage you buy for the lender. It’s the lender’s guarantee for allowing you to put down as little as 3% – 5% on a home.
Typically, lenders require a 20% down payment for conventional financing, but many borrowers don’t have that much to put down. With PMI, you can make a much lower down payment, but cover the cost of insurance to protect the lender if you default.
PMI is insurance for the lender only, but you pay the premiums. It’s your cost because you aren’t making a large down payment.
Lenders take a chance when borrowers don’t have a lot of their own money invested in the home. It would be a lot easier for you to walk away from a home if you have 3% invested versus 20%, right?
You pay the PMI premiums, but the insurance is only used if you default on the loan. In other words, if you get so far behind that the lender starts foreclosure proceedings, they’d make a claim on the insurance.
Here’s the good news.
You only have to pay the premiums until you owe less than 80% of the home’s value. This can happen in a couple of ways.
You can request to cancel PMI whenever you get the balance lower than 80% of the home’s value, but lenders use the original value unless you pay for a new appraisal.
As long as you have a timely payment history and there aren’t any other issues with your account, they may approve your request to cancel it.
If not, by law lenders must cancel PMI automatically when you owe 78% of the home’s original value.
PMI doesn’t add a lot to your mortgage payment, and it makes it a lot easier to buy a home without a large down payment.
If you have good credit and a low debt-to-income ratio, you might qualify for conventional financing with PMI. You’ll pay the insurance temporarily while you enjoy your new dream home.
If you need help finding the perfect home or understanding how PMI would affect your payment, contact me today!