Understanding Private Mortgage Insurance
November 13, 2019
For first-time home buyers, getting a mortgage is often the most daunting part of the process, but what many first-timers may not realize is that there is an abundance of loan options available. Better yet, many of the options available to first-time home buyers don’t require a 20 percent down payment as a conventional mortgage does. In fact, in today’s market, there are even a few low down payment mortgage options available even if you’ve purchased a home previously.
While that may be good news, there is a catch.
Anytime a borrower puts less than 20 percent down will require private mortgage insurance or PMI. This protects the lender in the event that case that borrower defaults on the loan. PMI will vary depending on the type of loan, the lender, and the borrower. It typically falls between 0.5 and 2 percent of the loan amount annually. The cost is usually paid as part of the monthly payment. For example, if you borrow $200,000 and your PMI is 1 percent, you will pay $2,000 per year or about $167 per month.
Once the borrower pays down 20 percent of the mortgage, in other word the loan to value (LTV) has reached 80 percent, the borrower can request that the PMI be canceled by the lender. However, it’s important to note that the lender is not obligated to cancel the PMI until LTV has reached 78 percent. Be sure to discuss this with your lender before entering into the mortgage.
Some lenders may allow a one-time PMI payment made at the time of the loan origination or start of the loan rather than rolling it into the mortgage. Typically the borrower will pay 3-5 percent, which can offer a significant savings over time in some instances. However, you’ll want to understand the lender’s PMI refund policy. That’s because if you cancel the loan prior to maturity, you may be entitled to a refund on the PMI paid up front. Even if you plan to stay in the home forever, it’s a good idea to plan for the unexpected such as job relocation, growing family, or a sudden loss of income.
For more information on buying a home, check out our first-time home buying series:
Say What? Home Buying Lingo You Should Know
The Difference Between a Pre-Qualification and Pre-Approval