What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance, or PMI, is a type of insurance that protects investors in case a borrower defaults on their mortgage. Typically required for conventional loans when the down payment is less than 20%, PMI allows investors to approve higher-risk loans while giving buyers a pathway to homeownership without a large down payment.
Why Do You Need PMI?
PMI is not for the borrower’s benefit but rather the investor’s. It compensates the investor if the borrower is unable to make their mortgage payments and the property goes into foreclosure. While PMI helps buyers enter the housing market sooner, there is an additional cost that is included in the monthly mortgage payments.
How PMI Affects Your Mortgage Payments
PMI payments can vary depending on several factors, including:
- Down Payment Amount: The lower your down payment, the higher your PMI premium.
- Credit Score: Higher credit scores typically mean lower PMI rates.
- Loan Term: Shorter loan terms may reduce the cost of PMI.
- Loan Type: Adjustable-rate mortgages (ARMs) might have different PMI structures compared to fixed-rate loans.
How to Avoid PMI
There are several strategies to avoid PMI and reduce your monthly mortgage expenses:
- Make a Larger Down Payment: Putting down 20% or more of the home’s purchase price eliminates the need for PMI.
- Opt for a Piggyback Loan: A second mortgage can cover the difference between your down payment and 20% equity. Keep in mind that this will increase debt-to-income ratio.
- Utilize VA Loans: Eligible veterans can avoid PMI with a VA loan, which doesn’t require it.
How to Remove PMI Once You Have It
If you’re already paying PMI, you may be able to remove it once you reach 20% equity in your home. You can request your servicer, the company to whom you pay your monthly mortgage, to cancel PMI, or it will automatically terminate when you reach 22% equity based on the original loan terms.
Final Thoughts: Weighing the Pros and Cons
While PMI can increase your mortgage costs, it allows for earlier homeownership and greater financial flexibility. Understanding your options and how to eliminate PMI can save you thousands over the life of your loan. Always consult with your Ellason Mortgage Group professional to explore the best strategies for your financial situation. Contact us today!
