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The Role of Private Mortgage Insurance (PMI) and How to Get Rid of It

One of the common myths about getting a mortgage is that you’ll need a down payment of 20%. The good news is that’s not the case! However, when you're buying a home with a down payment of less than 20%, you're likely to encounter something called Private Mortgage Insurance (PMI). This additional cost is often misunderstood by many homebuyers. Understanding PMI and its implications can save you significant money in the long run. In this article, we'll explore the role of PMI, why it exists, and most importantly, how you can get rid of it.



What is PMI?

Private Mortgage Insurance, or PMI, is an insurance policy that protects the lender in case the borrower defaults on their mortgage payments. It's typically required when the down payment is less than 20% of the home's purchase price. This insurance allows lenders to offer mortgages with smaller down payments, making homeownership more accessible to individuals who may not have substantial savings for a large down payment.

 

 

Owning a home sooner with PMI

While PMI adds to your monthly payment, it unlocks several advantages for aspiring homeowners:


  1. Lower Down Payment: PMI allows you to buy a home with a smaller down payment, typically less than 20%. This means you can save less upfront and become a homeowner faster.

  2. More Financing Options: PMI can expand your financing options. With PMI, lenders may offer you more flexibility in terms of loan amounts and monthly payments, giving you a wider range of houses and neighborhoods to consider.

  3. Seize Low Rates: By reducing the down payment requirement, PMI lets you act quickly to secure favorable mortgage rates, potentially saving you money over the long term.

  4. Escape PMI Eventually: PMI isn't permanent. Once your home equity reaches a certain level (through your mortgage payments and potential home value appreciation), see below for ways to eliminate PMI.

  5. Hassle-Free Process: Your lender handles everything related to PMI, from finding the insurance provider to determining the plan details. They'll provide this information before finalizing your loan. So, while there's an extra cost, PMI saves you time and effort.

 

 

How much will my PMI cost?

The cost of PMI varies based on factors like down payment size, credit score, and loan amount. Generally, it ranges 0.22% to 2.25% of the original loan amount annually. This additional cost is usually included in your monthly mortgage payment. Time Stamped gives examples of how credit score and down payment size effect PMI amount:


620 credit score: If you have a credit score of 620 and make a 5% down payment (resulting in 95% LTV ratio), the annual PMI cost would be 1.42% of the loan value. For a $300,000 home, that equals a monthly PMI payment of $337.


720 credit score: If you have a credit score of 720 and make a 10% down payment (resulting in a 90% LTV ratio), the annual PMI cost would be a 0.46% of the loan value. For a $300,000 home, that equals a monthly PMI payment of $104.

 

 

Will I have PMI for the life of the loan?

Good news – you can get rid of PMI! Here are 5 ways you can get rid of that pesky PMI:

 

  1. Increase Your Home Equity: As you pay down your mortgage balance over time, you'll automatically increase your home equity. Once your loan-to-value ratio (LTV) reaches 80% or less, you can request the cancellation of PMI. This typically involves contacting your lender and providing documentation to verify your home's current value and the remaining loan balance.  

  2. Make Extra Mortgage Payments: Accelerating your mortgage payments can help you reach the 80% LTV threshold sooner. Consider making additional payments towards your principal balance whenever possible. Even small additional payments each month can add up over time and help you build equity faster.

  3. Home Appreciation: If the value of your home increases due to market appreciation or home improvements, your LTV ratio may decrease, making it easier to cancel PMI. Keep an eye on local real estate trends and consider investing in home upgrades that can boost your property's value.

  4.  Refinance Your Mortgage: Another option to eliminate PMI is to refinance your mortgage. If your home has appreciated significantly since you purchased it or if your credit score has improved, you may qualify for a new loan without PMI. However, refinancing comes with closing costs, so it's essential to weigh the potential savings against the expenses involved.  

  5. Homeowners Protection Act (HOPA): HOPA requires automatic cancellation of PMI. For single unit, primary residences PMI will automatically terminate on the date the loan balance is scheduled to reach 78% of the  original value of the property.

 

Private Mortgage Insurance (PMI) plays a vital role in enabling homeownership for borrowers with limited down payment savings. However, it is an additional expense that borrowers should aim to eliminate as soon as possible. By understanding how PMI works and implementing strategies to build home equity, homeowners can take steps towards freeing themselves from this additional expense. Whether through regular mortgage payments, home appreciation, or refinancing, the ultimate goal is achieving greater financial freedom and peace of mind in homeownership.


Talk with a local Northpoint Loan Officer about how PMI can affect your unique situation.

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