No April Fools: What is Mortgage Insurance and Do You Need It?
PMI. What is it and do you need it? PMI stands for Private Mortgage Insurance and the answer is “sometimes.” Before you get preapproved for a mortgage or make an offer on your next home, it may be helpful to better understand PMI and how it could affect your home buying process. Don’t let any surprises creep up on you like an April Fool’s joke. Let’s take a closer look.
What Is PMI?
If you take out a conventional home loan, you may be surprised to find PMI is incorporated. PMI stands for Private Mortgage Insurance and is generally required if you get a conventional mortgage to buy your home, especially if you’re not able to put at least 20% down.
PMI may also be required for people who refinance their home with less than 20% equity.
When Is it Required?
You will be required to have PMI if you put less than 20% down on a conventional home. You will continue to pay the PMI premiums until you have built enough equity in the home.
Once you’ve reached a loan-to-value ratio, also seen as LTV, of 80% you no longer need to pay the PMI premiums each month. Its best to contact your current servicer, and inform them of the close LTV, ask them to remove PMI, if less than 10 years have lapsed since original note date. The Servicer may have an AVM (Automated Valuation Method) or you may be required to order and pay an appraisal fee to evidence your value, and LTV is below 80%. On conventional loans, after 10 years, PMI will drop off (per your specific Note details).
What about other loan types?
PMI is always required on FHA & USDA loans. Both an upfront MIP (Mortgage Insurance Premium) is paid or financed above and beyond the base loan amount, and a monthly PMI costs also is added to the payment. VA loans sometimes requires upfront MIP, and never requires a monthly PMI Cost. Contact Prime Mortgage Lending for more information.
What Does PMI Do?
It’s important to note that while PMI may be required for your specific kind of mortgage, it is intended to protect the institution against foreclosure. So, you’ll be required to have it but it doesn’t protect your purchase but rather protects the bank against foreclosure.
That’s why it’s required for conventional loans with less than 20% down and most government loans, so the bank can protect their assets in case a buyer is unable to pay.
How Do You Get It?
The addition of PMI payments will be rolled into your mortgage payment if your loan requires it. You’ll want to factor that cost into your overall monthly housing payment.
How Can You Avoid It?
There are a few ways to avoid PMI when buying your next home.
- Put down 20% or more.
- Use a different kind of loan.
- Pay a higher interest rate.
- Get a piggyback mortgage (Home Equity Loan or Home Equity Line of Credit).
- Use lender-paid mortgage insurance.
There are a lot of moving parts when it comes to these options, so it’s best to contact a lender, like GoPrime Mortgage, Inc. , to learn more.
