When buying a home, there are a multiple unfamiliar terms and phrases you’ll hear throughout the home buying processes. Private Mortgage Insurance (PMI) is a big part of the loan process, and important for you to understand before closing on your home loan. Here are some common private mortgage insurance questions and answers to guide you down the right path.
Common Private Mortgage Insurance Questions
What is private mortgage insurance?
PMI is a type of mortgage insurance you are required to pay if you pay less than 20% down on a loan. This insurance protects the lender if you stop making your mortgage payments and end up in a foreclosure situation.
How much private mortgage insurance will I need to pay?
PMI fees vary among borrowers depending on the amount of the loan, how much the borrower pays down, and the borrower’s credit score. They generally vary from 0.3 percent to about 1.5 percent of the original loan amount per year. In simple terms, if you are considered a threat or high risk to the lender, you may be required to pay PMI in your monthly mortgage payments.
You may be considered high risk if you’ve sold multiple homes recently, have been through a disclosure, or have an unsteady or undocumented income. Your loan officer will discuss any concerns with you and require proper documentation.
How do I get rid of PMI?
The remove private mortgage insurance, you must have at least 20% equity in the home. Once you have paid down the mortgage balance to 80% of the home’s original appraised value, you are able to ask you lender to remove the PMI. With an FHA loan, once you pay your debt to 78% of the home’s value, the FHA cancels your mortgage insurance.
Is it worth it to refinance to eliminate PMI?
If you have collected enough equity to eliminate your mortgage insurance, it may be worth it to talk with your lender to refinance your home. Refinancing is generally a good idea when you want to lower the interest rate on your existing loan. If interest rates have sky rocketed since you starting paying on your loan, it may not be worth it to refinance as you may not be saving money at that point.
Why Pay for PMI?
Paying private mortgage insurance is often necessary as first time home buyers aren’t able to pay 20% down on their first home. However, it’s important that you understand the terms of your private mortgage insurance and calculate your loan to value to avoid paying it longer than absolutely necessary.
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