Private Mortgage Insurance (PMI) – No one wants to pay it. This form of insurance protects your lender in case you fail to make your monthly mortgage payments.
PMI is not free. Fees vary, but you can expect to pay from .5% to 1% of your loan amount each year for this insurance. If your mortgage is $100,000, this means that you’ll pay about $83 a month or $1,000 a year if your PMI costs 1% of your loan.
You can avoid PMI, by coming up with a down payment of at least 20% of your home’s final purchase price. This will mitigate having to pay PMI. There is one exception – The FHA loan.
You can also request that your lender cancel PMI when you have paid down enough of your mortgage balance so that it equals at least 80% of your home’s original appraised value. Your mortgage servicer is required to automatically cancel your PMI when your mortgage balance falls to 78% of your home’s original appraised value.
If you think your home’s value has risen since you first bought it, automatically increasing your equity, you can always pay for a new appraisal to determine your residence’s current market value. If the value is indeed higher, it could mean that you’ll hit the needed 80% PMI threshold earlier. Be aware, though, that lenders are not required to accept your home’s new appraised value.
Although PMI does increase your monthly expense it isn’t alway a bad idea.
The good point about PMI is that it lets one buy more of a house without having to save up the required 20%. Many Americans can now reach the American dream with popular 3-5% down programs. These programs are possible because of private mortgage insurance. When you purchase a home you are required to purchase traditional homeowners insurance.
Your premiums for PMI, usually are required as part of your escrow account, if you do not put at least 20% down.
Private mortgage insurance does not give you additional homeowners insurance coverage, but it does give the bank insurance just incase you do not fulfill your obligations by not paying your mortgage payments. The use of PMI has been a great tool to get more Americans into homes.
FHA Loan – has upfront mortgage insurance premiums are 1.75 percent of the loan size.
If you use an FHA-backed mortgage for a purchase mortgage and your loan size is $300,000, then your Upfront MIP will be 1.75 percent of $300,000, or $5,250. Upfront MIP is not paid as cash. An important difference between the conventional mortgage PMI and its counterpart with FHA is that the FHA mortgage insurance never drops off. It continues for the life of the mortgage.
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Brought to you by
Jane E. Daley
Jeff Daley, PhD
REALTOR®, GRI, e-PRO, CLHMS
Luxury Valley Homes ® (LVH)