In what situations would you need Private Mortgage Insurance (PMI)?
Mortgage lenders are generally able to assess if a buyer will be able to pay back their home loan based on how much they put down towards the purchase of their new home (also known as a down payment). If your down payment is less than 20%, most lenders will require you to have PMI as a way to cover their losses, in case you default on the loan.
By agreeing to have PMI, you can choose to make a down payment lower than 20%. While PMI appears to only benefit lenders, it actually allows them more flexibility in accepting borrowers that can only afford a small down payment; this ultimately makes home buying more accessible.
There are two different forms of mortgage insurance that you should do research on, mortgage insurance premiums and private mortgage insurance. Mortgage insurance premiums (MIPs) apply to FHA and VA mortgages, while PMI applies to conventional mortgages that are done through private companies. Since FHA and VA loans are insured by the government, they don’t need traditional PMI coverage like most conventional loans.
Like other forms of insurance, PMI isn’t the same with every mortgage lender. Here are a few things to keep in mind when considering your PMI options:
- Do Your Research: If you accept the first mortgage offer that a lender provides for you, then you’ll never know if you could qualify for a lower rate with a different lender! PMI works the same way. We recommend researching several options when it comes to your mortgage loan and your PMI. Check with different lenders to compare rates.
- Ask Around: It’s also possible to work with a mortgage lender to see if they’ll avoid the mandatory PMI. In exchange, they may place higher premiums and interest rates on the mortgage. It’s a good idea to do the math though, as it’s possible that the higher interest rate could actually lead to a higher overall cost than what the PMI would yield.
Even if you don’t want to pay for PMI, it doesn’t have to be permanent. When your mortgage reaches 80% or less of your home’s current value, you can apply to have your PMI removed. You’ll need to stay up-to-date on your mortgage payments, though!
If your mortgage is less than 80% of your home’s value, you’ll need to provide a written request to your mortgage lender requesting that they eliminate your PMI. They’ll work with you on having your home appraisal to ensure that the mortgage is at or below 80%. Once this is done and approved, your lender will likely be able to terminate your PMI.
Private mortgage insurance is another common part of a home buyer’s journey. So now that you know about PMI, the first step is to determine if it applies to your situation; if it does, do your research and shop around to get the best rate possible. You’ll be well on your way to buying your home in no time.