What is PMI?

what is private mortgage insurance

PMI stands for Private mortgage insurance. PMI is required for potential home buyers with less than 20% down or borrowers who wish to refinance with less than 20% equity.
The market is continuously rising, and first-time homebuyers are struggling to find a forever home. While there are plenty of ways to buy a home without 20% down, it comes at an extra cost.

 

 

Definition of Private mortgage insurance

Private mortgage insurance, also known as PMI, is mortgage insurance that you may be required to pay when you acquire a Conventional, FHA or USDA mortgage. Like any other kind of mortgage insurance, PMI protects your lender if you cease to make payments or default on your mortgage. Established in 1957, PMI guarantees your lender protection for the greater risk due to lower down payment, but it also increases your mortgage payments. But, it allows more people to become homeowners with less money for a down payment.

 

Why do I need PMI?

While home insurance protects you and your home, PMI protects the lender and offsets the risks. It comes with a monthly payment and may even come with an upfront premium as well. PMI covers the additional risk of default the lender incurs due to the lower down payment. Lenders consider a mortgage default more likely to happen if you have less ownership stake in your property. Private mortgage insurance can help you qualify for a loan you wouldn’t have qualified for if a greater down payment was required. While PMI is an initial added cost, it enables you to buy now instead of waiting ten years to build enough savings.

How much does Private mortgage insurance cost?

Despite the data, many potential homeowners have a false perception of how much is needed for a down often. In fact, only 13% of buyers put 20% down on their homes. The cost of PMI varies based on your loan-to-value ratio, which is the loan amount versus the purchase price or appraised value for a refinance. While the amount can change, you can generally expect payments of between .5% and 1% of your loan amount as an annual premium (which is then divided by 12 for your monthly payment).

The PMI rate also depends on your FICO score, your mortgage terms and type of loan. Higher credit yields a lower insurance payment as the borrower continuously showcases his ability to repay his debts. There are several payment methods, but most commonly, the cost of your mortgage insurance is added onto your monthly mortgage payments. Your lender will detail your premiums on your loan estimate and final closing form. You can expect to either pay a premium at closing, through monthly payments, or both.

Thankfully, PMI isn’t forever. The lender must indicate when you’ll hit the 80 percent loan ratio, at which point you’ll be able to opt out. You must be current and up to date on all your payments before you can cancel your policy. At that point, you can terminate your PMI and remove that expense from your monthly expenditures unless you have a FHA mortgage.

 

 

 

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How does the PMI calculator work?

The calculator estimates how much you’ll need to pay for your PMI and helps you evaluate how much you can afford to pay for your next home. With the price of your home, down payment amount, loan term, mortgage, and insurance rate, the calculator estimates your monthly PMI cost.

Many borrowed don’t mind paying PMI if they can get into their dream home sooner. However, the added cost of PMI can push you over your monthly budget if you aren’t careful. With a PMI calculator, evaluate your financial situation and what you can afford with the following information :

  1. Enter the price of your home.  For a more accurate result, enter the amount for which you are already pre-qualified or pre-approved.
  2. Enter your down payment – the amount of cash you plan to pay upfront for your home.
  3. Enter your lender’s interest rate or use today’s average mortgage rate. Find out your loan to value ratio by dividing your loan amount by your property price. This figure is significant when lenders establish your PMI—the higher the LTV, the higher your monthly cost.
  4. Enter the duration of your loan. A 25 or 30-year term is the most common, especially among first-time buyers.
  5. Find out your lender’s PMI rate. If you aren’t sure of your PMI rate, choose a rate in the middle of the typical range of 0.5% and 2%.

This unique mortgage calculator not only generates an amortization it will also show your approximate PMI payment. Once you’ve entered all the information, you’ll have a monthly PMI cost, your total PMI amount until you reach 20% of equity, and the total cost of your loan over its entire term.

Private mortgage insurance benefits

Private mortgage insurance may seem like a real pain; after all, who wants to increase their payments and not reek benefits from it. However, the truth is that PMI is beneficial, especially with the uncertainty of today’s economy.

Due to the recent COVID-19 pandemic, the market is red hot, and house prices are at their all-time high. Meanwhile, many people not only lost their homes and businesses, but they also lost all their assets. When these same people are ready to repurchase a home, they have minimal assets.

Private mortgage insurance allows consumers to attain their goals and get them into their dream homes faster. Imagine if you’d need to put 20% down on the asking price, it could take years to own your first home. Instead of renting a home and throwing your money out the window, you could become a homeowner with PMI.

Today, potential homebuyers can put a smaller down payment and pay private mortgage insurance. When you consider putting a down payment as low as 5%, the extra monthly PMI doesn’t seem so bad. Although PMI provides lenders with protection, it helps you get into your home faster and save some of your hard-earned cash. Homeownership finally becomes within reach.

Another enormous benefit of paying a PMI is your capacity to purchase the right home for your family. If you’re required to put 20% down, you might have to buy a home that doesn’t meet your needs. For example, you may need to compromise on the number of bedrooms, storage space, or your home’s overall state. Most likely, you’d have to look for homes that you wouldn’t even consider. By paying the PMI, you can purchase a more prominent or move-in-ready home in your neighborhood.

Before you reject the idea of paying private mortgage insurance, it is good to understand its benefits. Today, more and more people opt to pay PMI to get into their dream home. Get in touch with Cain Mortgage Team, your local mortgage experts to determine what option is best for you.

 

Sources

Certified Mortgage Broker Benefits of Private Mortgage (PMI)
https://certifiedmortgagebroker.com/private-mortgage-lender-toronto/benefits-of-pmi/

Justin McHood (February 12, 2015). The Benefits of Private Mortgage Insurance
https://www.blownmortgage.com/benefits-private-mortgage-insurance/

Consumer Financial Protection Bureau (July 28, 2017). What is private mortgage insurance?
https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/

Aly J. Yale – The Balance (July 11, 2020). What Is Private Mortgage Insurance (PMI)?
https://www.thebalance.com/private-mortgage-insurance-pmi-2386166

Tanza Loudenback and Laura Grace Tarpley, CEPF (Jan 13, 2021). Private mortgage insurance can help first-time homebuyers get in the door
https://www.businessinsider.com/personal-finance/what-is-private-mortgage-insurance-definition-cost

TheCalculator.co (Dec 21, 2014). PMI Calculator
https://www.thecalculator.co/finance/PMI-Calculator-100.html

Nerd Wallet. PMI Calculator
https://www.nerdwallet.com/article/mortgages/pmi-calculator

My Home – Freddie Mac (September 13, 2019). Pricing Out PMI
https://myhome.freddiemac.com/blog/homeownership/20190913_private_mortgage_insurance.page