Private Mortgage Insurance (PMI) is a policy that protects the lender or the lending institution if you fail to repay the loan. PMI covers a part or all of the remaining mortgage, the borrower pays for the policy while the lender benefits. Like other insurance policies, private mortgage insurance comes with an annual premium, and sometimes it also has an upfront premium too. If you want to dive in deep about knowing PMIs, then read our blog ‘Everything To Know About A Private Mortgage Insurance ‘.
What is Private Mortgage Insurance?
Private Mortgage Insurance assures the lender that the loan will be paid, having such a policy helps borrowers to qualify for a loan that they eventually wouldn’t have qualified for. This insurance is mandatory if you pay less than a 20% down payment on a purchase.
In some cases, lenders may allow you to make a down payment of less than 20% without PMI although these loans may have steeper interest rates.
1. How Does Private Mortgage Insurance Work?
Similar to other insurance policies, you pay premiums to cover any unforeseen damages due to unfortunate situations. In such instances, the insurance company is liable for paying the outstanding loan if you find yourself incapable of doing it. Lenders contemplate that it is more likely to happen if you have less of an ownership stake in the property.
2. Private Mortgage Insurance vs. Mortgage Protection Insurance
Private mortgage insurance (PMI) is different from Mortgage Protection Insurance (MPI). Mortgage Protection Insurance won’t pay off the whole outstanding balance of your loan if you default. Although it may still make some payments if you fall victim to uncertain situations like job loss, accidents that led to disability, or any kind of serious illness.
Here are some more insights into both PMI and MPI to help you understand better –
Private Mortgage Insurance
- A PMI insures against a complete default on the loan
- It protects the lender in unforeseen circumstances
- It pays in the event of foreclosure
Mortgage Protection Insurance
- An MPI only covers a chunk or some missed mortgage payments
- An MPI protects the borrower in catastrophic events
- May pay in the event of the borrower’s death
Private mortgage insurance (PMI) is an additional cost that homebuyers may need to pay if they have a down payment of less than 20% of the home’s value. For instance, if you purchase a $300,000 home with a 10% down payment, you could be paying between $1,500 to $3,000 per year in PMI.
To make it more manageable, this cost is typically divided into monthly payments, which could range from $125 to $250 per month in this example. It’s important to factor in PMI when budgeting for your monthly mortgage payments.
Factors Influencing PMI
Amount of Down Payment
When buying a home, the amount of your down payment can have a big impact on your mortgage payments and PMI (private mortgage insurance) costs. If you make a smaller down payment, your lender may see you as a higher risk and charge you more for PMI. This can also lead to higher monthly mortgage payments and a longer time before you can cancel PMI. However, even if you can’t afford a 20% down payment, putting down more money upfront can help lower your PMI costs and save you money in the long run.
Credit Score History
When applying for a loan, your credit history is an important factor that lenders consider. They will review your credit score to determine how reliable you have been in repaying borrowed money in the past.
A higher credit score indicates that you regularly make payments above the minimum amount, borrow within your means, pay bills on time, and avoid maxing out your credit limit. This demonstrates that you are a responsible borrower and may result in lower PMI premiums.
However, if your credit score is lower, lenders may view you as a higher risk borrower and charge higher PMI premiums. It’s important to maintain a solid credit history to increase your chances of being approved for a loan and receiving favorable terms.
Type of Loan
The type of loan you choose can impact the amount of private mortgage insurance (PMI) you’ll have to pay.
Fixed-rate loans offer less risk because the interest rate remains the same, resulting in consistent mortgage payments. This lower risk can lead to a lower PMI rate, potentially reducing the amount you need to pay.
On the other hand, adjustable-rate mortgages (ARMs) can bring more risk because the interest rate can fluctuate based on the market, making it harder to predict future mortgage payments. This could result in a higher PMI rate.
However, ARMs often have lower initial interest rates, allowing you to pay more toward your principal and build equity faster, potentially reducing the amount of PMI you need to pay.
Your lender can guide you through different loan options and help you determine how much PMI you should expect to pay.
How to Avoid Borrower Paid-PMI?
If you’re a home buyer looking to avoid paying borrower-paid PMI (BPMI), there are a few strategies you can consider.
One option is to make a larger down payment, as PMI is typically required for loans with a down payment of less than 20%.
Another option is to look into lender-paid PMI (LPMI), where the lender pays the PMI premium but may charge a slightly higher interest rate.
Finally, you could consider a piggyback loan, where you take out a second loan to cover the down payment and avoid PMI altogether.
1. Make a Large Down Payment
If you’re looking to avoid paying Borrower-Paid Mortgage Insurance (BPMI) on your home, consider making a large down payment of at least 20%. This will not only help you avoid BPMI altogether, but it will also give you more equity in your home from the start. Alternatively, if you already have BPMI and have reached 20% equity in your home, you can request to have it removed. And once you reach 22% equity, BPMI is often removed automatically.
2. Apply for FHA & USDA Loan
If you’re looking to avoid private mortgage insurance (PMI), you may want to consider taking out an FHA or USDA loan.
However, it’s important to note that these loans come with their own form of mortgage insurance. For FHA loans, this is known as mortgage insurance premiums (MIP), and for USDA loans, it’s guarantee fees. These fees typically last for the life of the loan, unless you have an FHA loan with a down payment or equity of 10% or more, in which case you’ll only pay MIP for 11 years. Ultimately, these fees will be in place until you pay off the house, sell it, or refinance.
3. VA Loan can help you
If you’re a veteran or active-duty service member looking to buy a home, taking out a VA loan may be a great option for you. Unlike other loans, VA loans don’t require mortgage insurance. Instead, they have a one-time funding fee that can be paid at closing or added to the loan amount.
The size of the funding fee depends on factors such as your down payment or equity and whether it’s your first or subsequent use of the loan. It can range from 1.25% to 3.3% of the loan amount.
However, if you’re a qualified surviving spouse or receive VA disability, you may be exempt from paying the funding fee. Additionally, if you’re refinancing with a VA Streamline loan, the funding fee is always 0.5%.
4. Piggyback Loan
If you’re looking to avoid paying private mortgage insurance (PMI) on a conventional loan, a piggyback loan may be an option to consider. With this approach, you make a down payment of at least 10% and take out a second mortgage, such as a home equity loan or line of credit, to cover the remaining amount needed to reach 20% equity on your primary loan.
If you take a second mortgage, you will have to pay it back with a higher interest rate. This is because if you can’t pay back your loans, your first mortgage will be paid first. Make sure to check if this will save you money or if it’s better to just pay the PMI.
How to Avoid Lender Paid PMI
If you’re looking to avoid lender-paid private mortgage insurance (LPMI), there are a few options available.
One option is to pay your entire PMI upfront at closing, which won’t require a higher interest rate. However, keep in mind that with LPMI, your payments are made as a lump sum upfront, so it’s impossible to cancel it.
Another option is to go with borrower-paid PMI (BPMI), which may be cheaper depending on the mortgage insurance rates at the time. With BPMI, you’ll pay a monthly premium until you reach at least 20% equity. While you can’t completely avoid paying for PMI with less than a 20% down payment, these options can help you save money in the long run.
The Pros and Cons of Private Mortgage Insurance
To begin with, there are both advantages and disadvantages of PMIs. Although, it can make it easier for you to qualify for a loan. PMI lowers the risk you present to the lender. A PMI gives you more buying power as it lowers the down payment that you are required to make every time. It can also act as an aid when you’re short of funds.
A primary drawback of PMI is that it increases the monthly mortgage payments and sometimes the closing costs too. Furthermore, PMI payments are no longer tax deductible. Although, you may be able to write off premiums on a loan taken out before 2017 (based on your income and the terms of the mortgage). Additionally, mortgage insurance has one more downside. It only protects the lender in case you default. It absolutely offers no protection to you (the borrower) if you lag behind in repayments.
1. Pros of PMI
- It enables you to qualify for a mortgage loan
- Allows you to make a smaller down payment
2. Cons of PMI
- It may increase the monthly payments
- Can increase the closing costs
- It provides no protection to the borrower
- The premiums are not tax-deductible
Reasons for Cancelling PMI (If you already have it)
There are several reasons why you may want to cancel your private mortgage insurance (PMI) if you already have it.
- One reason is if you have reached 20% equity in your home, regardless of whether you made extra payments towards your principal.
- Another reason is if you have made significant improvements to your home that have substantially increased its value. If your loan is owned by Fannie Mae, you must have 25% equity or more, while the Freddie Mac requirement is still 20%.
- You can also request removal of your mortgage insurance based on natural increases in your property value due to market conditions. But Fannie Mae and Freddie Mac require you to have 25% equity if the request is made 2-5 years after you close on your loan.
- After 5 years, you only need to have 20% equity. However, you must be current on your mortgage payments. For this, an appraisal must be done to verify property value for your request to be honored.
If you have a single-unit primary property or second home and don’t request cancellation. PMI is automatically canceled when you reach 22% equity. This is based on the original loan amortization schedule, assuming you’re current on your loan payments.
Canceling PMI On A Multi-Unit Property
The rules for canceling PMI on a property with many units are different. It depends on if you live there or if it’s an investment. For Fannie Mae loans, you can ask to cancel PMI when you have 30% equity. For Freddie Mac, you need 35% equity.
If you have a property with many units or an investment property with Freddie Mac, you need to ask to cancel the mortgage insurance. It won’t cancel by itself. But with Fannie Mae, the mortgage insurance cancels by itself halfway through the loan term.
Is There A Need to Pay for Private Mortgage Insurance?
A PMI typically costs around 0.5% -1% of your loan value on an annual basis. Although, it is subject to vary. The lender will look at your PMI premiums in detail on your initial loan estimate inclusively of the final closing disclosure form. Here, you choose to pay the premium upfront while closing or as a part of your monthly payments.
Now that you know everything about private mortgage insurance you may pick and choose wisely. If you think you’re running out of time and can’t make outstanding mortgage payments. It’s probably time to sell your house fast for cash. Elite Properties can help you sell your house as we are a cash buying company and we assure to make the home selling process easy for you. For further information call us at 718-977-5462 and we will guide you through the selling process.
In order to assess property taxes, localities usually have a home appraisal. When you sell your house or refinance it, the bank is liable to order an independent appraisal. This is done to assure it is lending against the property’s true value. The satisfaction of a home appraisal relies on if you are a seller, a prospective buyer, or a taxpayer. If you’re someone who is unhappy with their home appraisal, scroll down to read our blog ‘This Is How You Can Challenge A Low Home Appraisal’.
A thing to keep in mind is that not all homes are up for appraisals if you are a cash buyer you can opt-out. Although, this only happens when the price inclines on the steeper end of the market and the inventory is low. However, if you are planning to finance your new home appraisal is mandatory. On the other hand, according to most housing experts, if you are paying for your house in cash, it is always better to know its worth.
The Multiple Kind of Appraisals
To understand better make sure you are aware of the multiple types of appraisals.
- Online Appraisal
Many companies nowadays have started performing electronic appraisals to cut costs. Here, they do internet research on comps (comparable homes) to fix the value of your home based on comps and other factors inclusively. Although, in an online appraisal there is a high chance that information on newly renovated rooms or items can be skipped. If something like this occurs, it might impact the assessment of your house as these things are not visible online.
- County Appraisals
Drive-by appraisals are another kind of appraisal that usually takes place for counties. In drive-by appraisals, a person may take the current picture of their home and comparables, again without the need to visit the house.
- Traditional Appraisal
Lastly, the traditional appraisal occurs when the appraiser visits the house and gathers information. The appraiser further asks questions regarding improvements. Post which he/she will make a comparison to other similar houses in the area or town. Furthermore, a traditional appraisal may cost several dollars and takes place when a home is sold to the new owner.
Here’s How To Challenge A County Appraisal
The reason for conducting a county appraisal is to assess property taxes based on the current value of your home. If you aren’t thinking of moving any time soon, and when the assessment comes in lower than your expectations. A thing to consider is that your property tax bill will also be less. Additionally, if you want to sell your house in the future you can call the county auditor. There are many localities that allow you to appeal the assessment by providing proof of upgrades or improvements.
Furthermore, while evaluating the property a real estate agent researches the comps in the area. This means using the county’s assessed value may not hold as much importance.
Here’s How You Can Challenge Other Appraisals
If you’re buying a house and the appraisal comes in too low, it will result in declining your mortgage loan approval from the lender. Although, you still have multiple options to try before giving up.
First off, as the purchaser of the appraisal, you are entitled to view the appraisal. Make sure to work closely with the seller’s real estate agent and ensure all major upgrades are taken care off while the assessment. Additionally, ask the seller’s real estate agent to talk to the appraiser about the comps they examined while finalizing the selling price.
You can also request the appraiser to re-examine their results based on comparables. If there are a handful of recent sales in the neighborhood. The appraiser may have found similar homes in other neighborhoods that weren’t comparable as initially thought. If you can provide authentic information to the appraiser there is a possibility they might reconsider the assessment.
Lastly, remember to always be polite while challenging an appraisal. The appraiser may not want to admit that they’re wrong while putting in a place of defense. Make sure you challenge the assessment with absolute respect and talk it through.
There might be times when a low appraisal may work in your favor regardless of your status. Remember, an appraisal relies on multiple factors starting from the home’s condition, its market value, and comparables.
Furthermore, if you have strict time constraints and are planning to sell your house fast you can get in touch with Elite Properties. We buy houses for cash and make an offer based on the fair market value. Also, we offer fast closings so that you can work according to your timeline. Call us today at 718-977-5462 to know more.