Private Mortgage Insurance

Private Mortgage Insurance (PMI) is a significant type of insurance policy offered to the lender in order to protect them from borrower default loss. The PMI is provided by the private insurer. Eventually, when a home buyer makes a down payment of less than 20 percent, the lender has to require a PMI. The PMI is paid to the lender by the borrower until the enough equity is not invested in the home that makes the lender consider no risk of lending. Depending on the mortgage, down payment and its term including the credit score, the PMI can vary with a range from 0.25 percent to 2 percent of the loan balance per year. In an accretion to the interest, homeowners insurance, and property tax, an allocation of the paid PMI is added to the monthly mortgage payment. Hence, higher the rate you pay, the larger will be the risk factor as PMI is considered the percentage of the amount of your loan.

Different categories of PMI

The type of Mortgage loan you get decides the type of mortgage insurance.

  • Conventional loans: Also known as Private Mortgage Insurance (PMI) is a loan bought from the private sector.

  • FHA loans: Also known as Mortgage Insurance Premiums (MIP) is bought from the government.

  • VA loans: Veteran Affairs loan is guaranteed by the United States Department.

VA loan and FHA loans both have their comprehended rules and works differently from private mortgage insurance.

Who are appropriate for PMI

If you have opted for a conventional loan and your down payment is below 20 percent of the home value, lenders will urge for the Private Mortgage Insurance. Mortgage Insurance on government loan is mandatory regardless of the LTV. It is paid until enough equity is not invested in the home to have LTV (loan-to-value) ratio. For example, you bought a $100,000 home and require a down payment of 10%, or $10,000 hence, you get a $90,000 loan to pay the rest. The LTV, in this case, would be $90,000 divided by $100,000, or 90 percent. The longer the down payment of the mortgage, the lower will be the loan-to-value (LTV).

When to pay the PMI

The duration of paying the Private Mortgage Insurance depends on the loan policy. The lender can also offer you a policy of paying PMI in cash lump sum at closing or financing the premium. Usually, payments of PMI are done on monthly basis along with mortgage payment of existing loan.

Mortgage Insurance Rates

The higher the down payment or higher the credit score, the lower will be the premiums. The conventional mortgage insurance rates vary from higher and lower credit score/ down payments. Private Mortgage Insurance Premiums range between $30-70 per month. People opting for FHA loans have an annual premium and up-front MIP which is collected monthly.

How can I avert paying mortgage insurance

  • Avoid paying for Private Mortgage Insurance by doing the down payment of 20 percent or more when you buy the house.

  • You can request for the "Affordable Loan Solution" mortgage launched by Bank of America in 2016 which is in partnership with Freddie Mac and Self-Help Ventures Fund. This loan allows for the down payment of 3 percent with no mortgage insurance.

  • VA loans for veterans that do not require a mortgage insurance is another option to avoid PMI.

When to request for the cancellation of PMI

The borrower can request for the cancellation of the Private Mortgage Insurance once he or she has amplified the equity amount of 20 percent for the house. This will reduce the mortgage payment and will allow you to pay less money per month. Your PMI doesn't get canceled until you request them to cancel after reaching the market value of 20 percent or 22 percent appraised equity for the home. Make sure you contact your lender after reaching a 20 percent equity.