Does Private Mortgage Insurance Make Sense For You?

Does Private Mortgage Insurance Make Sense For YouIf you are reading this article, it’s entirely possible that you are considering buying a home. It’s also likely that you are weighing certain financial options between a sizable down payment or taking on the expense of mortgage insurance.

It’s important to understand that private mortgage insurance (PMI) helps mitigate the lender’s risk. It has little benefit to the homeowner, other than help facilitate the mortgage approval process. Home buyers would be well advised to understand the complexities of PMI because not everyone needs or can afford the additional cost.

Do You Need PMI?

PMI reduces the lending institution’s loss in the event a borrower cannot make payments. Homes that fall into foreclosure reportedly cost lenders upward of 60 percent of the remaining loan’s balance. That’s a significant amount of red ink in any ledger.

This reality prompts lenders to require buyers to purchase PMI when they cannot offset any potential loss with a 20 percent down payment or more. But keep in mind, the “20-percent” standard can be a bit misleading.

When a mortgage company considers your application, there are several factors at work beyond the size of your down payment. Banks scrutinize credit scores, repayment and bankruptcy history, as well as the types of mortgage programs that may be suitable. 

Those who are required to purchase PMI should also keep a close watch on the repayment process. Once the mortgage balance dips below 80 percent of the home value, you may be able to end the PMI requirement.

Consider someone buying a home below market value. If you purchase the property at 90-percent of its value and put 10 percent down, the 80-20 threshold may be met in the lender’s eyes more quickly. In some cases the PMI can be eliminated after meeting the 80% loan to value, usually after a period of time in the loan.

The flipside is that a lender can require PMI even after the 80-20 measure if the borrower is considered high risk or has poor credit history. Yes, it’s complicated and you would be wise to sit down with a home loan professional.

What Is PMI And What Does It Cost?

In many respects, PMI functions like many other types of insurance. The purchaser makes payments and the insurance company pays out in the event of a loss, meaning loan default.

Just like the factors that go into the PMI requirement, the method of arriving at a cost can also be complex. Down payment amount, home value, credit score and history will all be considered. Home buyers can often lower rates by increasing their initial down payment. In most cases, PMI premiums generally run between 0.3 and 1.5 percent.

There are two standard methods of paying the annual PMI. In most cases, it simply gets rolled into the monthly mortgage installments. In some instances, the sum can be paid upfront. This may open the door a crack to lower annual pricing.

The true value of PMI to a borrower remains its ability to help gain loan approval when you might otherwise be rejected. If you are considering purchasing a home, it’s important to speak with a mortgage professional about your options.

Will You Need Private Mortgage Insurance on Your Mortgage Loan?

Private Mortgage Insurance

 

Have you heard the term Private Mortgage Insurance (PMI) when looking to finance real estate?

You may be wondering what PMI is and how you know when you need to purchase it.

These answers can be hard to find among all the real estate jargon you might be hearing lately.

Below is the short version of what you need to know.

What is Private Mortgage Insurance?

Private Mortgage Insurance is an insurance premium required by some lenders to offset the risk of a borrower defaulting on their home loan.

When you put down less than 20 percent of the real estate’s purchase price, the lender will generally require that PMI is added to the loan.

It is usually added into the monthly mortgage payment until the equity position in the real estate reaches 20 percent. However, there may be other options available in your area.

Under the current law, PMI will be canceled automatically when you reach 22 percent equity in your home, if you are current on your payments.

If you aren’t current, the lender may not be required to cancel the mortgage insurance because the loan is considered high-risk.

After getting caught up on your payments, the PMI will likely be cancelled. Any money that you have overpaid must be refunded to you within 45 days.

What if Your Real Estate Increases in Value?

With a conventional loan, it may take as many as 15 years of a 30-year loan to pay your balance down 20 percent making the minimum monthly payment.

But, if property values in your area rise, you might be able to cancel the PMI sooner.

Some lenders may be willing to consider the new value of your home to determine the equity in your home.

You may, however, be responsible for any fees, like an appraisal, that are incurred to assess the new value of your property.

In the end, private mortgage insurance is likely a good option if you can’t afford a down payment of 20 percent of the purchase price.

Now May Be A Very Good Time To Take Action

With all of the activity happening the housing market, now may be the best time for you to purchase your new home. 

A smart next move would be speaking with a qualified home financing professional to learn which programs and down payment options are available in the Asheville area.