Mortgage Insurance

For many homeowners, their mortgage payment contains more than just principal and interest. A little something called PMI could be representing a significant portion of that payment, and it’s important for home buyers to understand this cost.

What Is PMI?

PMI stands for private mortgage insurance, or sometimes just mortgage insurance. However, it isn’t intended to mitigate risk for the homeowner, but rather the bank.

Statistics show that when a home buyer puts less than 20% down on a home, he/she is much more likely to default. So, requiring these buyers to carry PMI helps the bank hedge their losses in the event of a default.

It’s important to note that the home buyer doesn’t shop for PMI; this is all taken care of by the lender. However, the cost of PMI should be calculated out well before closing to help the home buyer be aware of his/her final mortgage payment.

Who Needs PMI?

Who will need to carry PMI depends on factors like the credit rating of the buyer and the exact mortgage being sought out. However, it’s safe to say that most home buyers with less than a 20% down payment will be required to carry PMI.

Does PMI Ever Go Away?

Eventually, PMI can be removed from a mortgage once enough of the principle has been paid down or enough years have passed.

It’s important for home buyers to fully understand the terms of their PMI requirement. Sometimes, it will be automatically removed once 20% of the house has been paid off, while other times, refinancing may be required.

Should Those Who Cannot Put 20% Down, Not Buy A House To Avoid PMI?

Unfortunately, this is not an easy question to answer. Yes, PMI is an extra cost that needs to be calculated into the cost of the home – but putting off a home purchase isn’t necessarily the right course of action.

For many families, it’s financially challenging to save up 20% of the cost of a home. After all, in 2010, the median home price of new homes sold in America was $221,800. A 20% down payment on such a home would be $44,360.

However, many find that it’s still cheaper, or just financially wiser, to buy a home with PMI than to continue renting. Each potential home buyer should call their mortgage professional to get more information about market trends in their area and to decide the appropriate course of action.

Are you thinking about using mortgage financing to buy a new home? If so, you’ve likely heard about mortgage insurance policies requirements and you may be wondering how they will affect you. In today’s blog post we’ll explore mortgage insurance and explain the difference between conventional, FHA, VA and USDA mortgage insurance policies.

How Does Private Mortgage Insurance or “PMI” Work?

While there are a number of reasons that your lender may require mortgage insurance, in general you’ll be required to purchase a conventional PMI policy if you are putting less than 20 percent of the home’s value in as a down payment. Another way your lender might explain this is that you have a “loan to value” or “LTV” ratio of higher than 80 percent, which means that the amount of your loan divided by the value of your home is higher than 0.8.

The cost of your private mortgage insurance policy will vary depending on a number of factors, such as your financial situation, FICO credit score, the cost of your home and more. Generally speaking you’ll be required to pay from one-half to one percent of the cost of your monthly mortgage payment in insurance fees. Once your LTV ratio moves below 80 percent you may no longer be required to pay for PMI.

How Does VA Mortgage Insurance Work?

If you qualify for a mortgage from Veterans’ Affairs you’ll be pleased to know that you won’t be required to pay for mortgage insurance. In some instances you actually won’t be required to pay a down payment either, meaning that you may be able to borrow up to $400,000 to purchase a home without having to invest a cent of your own capital.

How Does USDA Mortgage Insurance Work?

Did you know that the Department of Agriculture runs a mortgage program? The USDA Rural Development mortgage offering is government-backed and like the VA mortgage program above you can finance 100 percent of the cost of your home without investing a down payment. However, unlike the VA program you’ll be required to pay for mortgage insurance. Currently the annual mortgage insurance premium on USDA loans is 0.5 percent.

How Does FHA Mortgage Insurance Work?

Finally, don’t forget about the Federal Housing Administration’s mortgage program. If you qualify for a FHA-backed mortgage, you’ll be paying about 1.35 percent in mortgage insurance premiums if you make the minimum down payment.

As you can see, there is a bit of a learning curve involved with fully understanding how all of the different types of mortgage insurance work. To learn more about mortgages and how insurance can benefit you, contact your local mortgage professional today.