Everything You Need to Know about PMI
Understanding Private Mortgage Insurance + Making the Best of It
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Private Mortgage Insurance (PMI) is a type of insurance designed to protect a lender in case something goes wrong with a loan and payments are not being made. A PMI is typically required for those who paid less than 20 percent of the home’s purchase price towards the down payment. While PMI may just seem like an added stress, there are advantages that are worth it for some. A PMI will allow those who aren’t able to afford a big enough down payment right away to still become homeowners.
Types of PMI
When it comes to private mortgage insurance, you have a couple different options to choose from.
Borrower-paid mortgage insurance
With borrower-paid mortgage insurance, the premiums are part of your monthly bill. This includes things like the principal balance, interest charges and other costs such as property taxes. The funds will be disbursed every month to the insurance company.
Lender-paid mortgage insurance
Lender-paid mortgage insurance involves the mortgage lender covering the cost of the mortgage insurance. However, it’s important to note that you’ll still be paying for the coverage as well as a higher interest rate on the mortgage.
Single-premium mortgage insurance
Single-premium mortgage insurance combines the entire cost of your insurance into one payment. Paying upfront will allow you to pay less towards your monthly payments.
Split-premium mortgage insurance
Split-premium is similar to single-premium and borrower paid PMI. You pay an upfront premium, but can pay a smaller amount than with the other options. You will also get lower monthly costs, while lowering your mortgage payment at the same time.
FHA mortgage insurance
This type of mortgage insurance comes with an FHA loan where you make a payment upfront and then pay the mortgage insurance premiums.
Determining PMI Premiums
A couple different factors can go into determining the amount someone will be paying in their PMI premiums. A look into credit history can help lenders determine whether or not someone has had a past of responsible borrowing. A high credit score can be indicator of a couple good things that include:
- You pay more than the minimum on your credit card payments and other accounts.
- You ensure that all of the bills are paid on time.
- You don’t max out on your credit limit.
While those with a strong credit history can reap many benefits with a PMI, you should be a bit more wary if your credit score isn’t as good. A low credit score could exemplify that you’re an irresponsible borrower, and you’re likely to pay a high amount in PMI premiums. The type of loan you go with will also determine how much you have to pay in PMI premiums. Fixed-rate loans are among the least risky because you know the rates won’t change.
While PMI is just another additional cost to many, there are advantages PMI can provide which can also help you in the future.
- Low interest rates: Many of those who pay at least a 20 percent down payment towards a home can expect to see increased costs over the loan’s life span.
- Consolidate debt: PMI is the perfect opportunity for potential home buyers to consolidate debt. If a borrower has other debts that have higher interest rates, they are able to make a lower down payment and apply savings to debt with higher interest rates.
PMI is a cost that will end up hurting many rather than helping. Cons of PMI can include:
- High costs: The average cost of PMI will vary, anywhere from 0.5 to one percent of the total loan amount. For example, a $200,000 mortgage could equal an added $2,000 per year.
- Difficult to get rid of: Once you fall below the 80 percent loan to value ratio, you may be eligible to get your PMI removed. However, this can be a timely process and you might have to mail in an official letter.
PMI payments can be made in three different ways, depending on the lender. The three schedules include monthly, upfront, and hybrid. Monthly payments are the most common when it comes to PMI, because most people pay the PMI premiums along with the monthly mortgage payments. An upfront payment will allow you to pay everything in full, which will likely result in lower monthly costs. You will need to save for that large annual expense however! You can also opt for a hybrid option, where you make some of the payment upfront and the rest each month. Some lenders will give you the option of how you want to pay, others will not.
There are a couple ways to go about canceling your PMI. Options can include:
- Once your balance hits 78 percent of the original loan you were offered, mortgage servicers are legally required to stop charging PMI premiums. It’s important to note that this will not apply to ALL loans such as FHA loans. An FHA MIP can be canceled when at least 10 percent has been put down on your home.
- Home appraisal: You can request a professional appraisal of your home, which can be defined as “an unbiased professional opinion” of a home’s value. An appraisal is usually required with things like buying, refinancing, or selling a property with a mortgage involved. You can also refinance your mortgage through an appraisal, which is most logical if the original mortgage had a higher interest rate.
The factors that go into determining PMI are different for everyone, such as credit history and current financial situation. It’s always advised to talk with your lender beforehand about mortgage insurance and how much you might be expected to pay.
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