When a home buyer takes out a mortgage, one of the things the buyer may need to consider is the cost of private mortgage insurance (PMI). Knowing what PMI is, why it is necessary and how to get rid of PMI after enough time has passed can help home buyers decide how much money they can afford to spend on their future home.
What Is PMI?
Private mortgage insurance is an insurance policy to protect the lender in the event that the home buyer defaults on their mortgage payments. When payments stop, the insurance company pays the lender for the remaining balance. Private mortgage insurance is often a requirement for high-risk buyers.
When are You Required to Get PMI?
Private mortgage insurance is generally a requirement if a home buyer wants to purchase a home with less than a 20% down payment. Mortgage insurance is a requirement of FHA loans and is a requirement for conventional loans as well.
Is Private Mortgage Insurance Expensive?
Private mortgage insurance ranges in price but generally costs between 0.5% and 1% of the loan. Payments are typically month to month, and are tacked on to the mortgage payment. In fact, many home buyers stop noticing the price of their PMI after a while, because the payments are not separate from the home loan.
In other words, if a borrower has a loan of $200,000, they could be paying as much as $2,000 per year in PMI. This amounts to about $166 per month. This can be a lot of money for some borrowers.
When Can You Stop Paying Private Mortgage Insurance?
Many lenders will allow the borrower to drop their private mortgage insurance when they have 20% equity in their home. However, this is not done automatically. Borrowers who want to stop paying their PMI can do so by contacting their lender and following up with a written letter requesting that their private mortgage insurance be dropped.
What Can You Do to Avoid Paying PMI?
The best way borrowers can avoid paying PMI is by saving up 20% for a down payment. When this isn't possible, sometimes borrowers can get a second loan to pay the down payment for the first loan. This is called a "piggy back" loan. Piggy back loans can be risky because they tend to have adjustable rates or may need to be paid back in a shorter period of time than other loans. For a borrower who is close to having the money for a 20% down payment, it's better to wait and save money than it is to get two loans.
In some cases a borrower can also avoid paying PMI by taking out a smaller loan, which may mean buying a smaller house or buying a home in a different area. Working with a real estate professional can help buyers locate a Lafayette home they can afford. This will generally only work if the buyer is already close to having a 20% down payment.
Contact a Lender for More Information
If you're a home buyer who would like to borrow money to buy a home and you don't have enough money for a 20% down payment, contact a lender. Your lender can help you decide how much money you will need to save to get the mortgage you want. Your buyer can also help you estimate how much money you can expect to spend if you get a mortgage with a PMI payment.