You can ask any homeowner-buying and owning a home is expensive. Mortgage payments, property taxes, utilities, and other bills quickly add up.
If you want to buy a home but don’t have a large down payment saved, odds are you’ve discovered something called private mortgage insurance (PMI).
PMI is an extra monthly payment that you make (on top of your mortgage payment) when you don’t have enough to make a large (20%) down payment on your home.
However, if you want to buy a home and don’t want to tack on an extra monthly payment for PMI, you have options. In today’s post, I’m going to talk about some ways to avoid paying PMI on your mortgage so you can save more money in the long run.
Before we talk about getting rid of PMI, let’s spend a minute on what to expect when you do have to pay it.
PMI typically costs 0.30% to %1.15% of your total loan balance annually. That means that your PMI payments will decrease a moderate amount as you pay off your loan.
Furthermore, once you have paid off 22% of your loan, your PMI will be cancelled and you’ll only be responsible for your regular monthly mortgage payments.
Getting PMI waived early
With conventional loans, you can request to have your PMI cancelled once you’ve paid off 20% of the mortgage. However, many buyers with PMI are using some form of first-time buyer loan, such as an FHA loan.
With an FHA loan, you’ll be stuck with PMI for the lifetime of the loan if you don’t make a down payment of 10% or more. That’s a lot of PMI payments, especially if you take out a 30 year loan, and it can quickly add up.
If you have an FHA loan with FHA insurance, the only way to cancel the insurance is to refinance into a non-FHA insured loan. And remember--refinancing has its own costs and complications.
Making it to the 20% repayment mark
On conventional loans, the best way to get rid of PMI is to reach your 20% repayment mark as soon as possible. That could mean aggressively paying off your mortgage until you reach that point.
This can be achieved by making extra payments, or just paying more each month. However, you don’t want to neglect other debt that could be accruing costly interest in favor of paying off your loans. Make sure you do the math and find out which debt will be more expensive before neglecting other debt.
Once you do reach the 20% repayment mark, you’ll have to remember to apply to have your PMI canceled with your lender. Otherwise, it will be canceled automatically at 22%.
You may have heard of private mortgage insurance, also known as PMI, but you’re probably not sure what exactly it is. If your down payment is less than 20% of the purchase price of the home, then you’ll need to pay for this additional insurance in order to secure a loan for the home. This type of policy protects the lender if you end up in a foreclosure situation. This way, the lender is assured that they will not lose money.
Private mortgage insurance is also required if you refinance your home when it has accrued to less than 20% equity. Again, this protects the lender from losing money if the loan is defaulted on.
The fees involved with private mortgage insurance can range based on a few factors including the actual size of the down payment and your credit score. You can expect the cost of the insurance to be somewhere between 0.3% and 1.5% of the loan amount per year. The PMI premiums are tax deductible some years and other years they are not. It really all depends upon the state of the government and what they have enacted for the particular fiscal year. Private mortgage insurance premiums can be paid either monthly or with a large payment upfront, although most policies will require the borrower to pay on a monthly basis.
This Insurance Can Be Canceled
The lender will automatically cancel your PMI once the loan drops down to 78% of the home’s value. For this reason, you’ll want to keep track of your payments in order to see how far away you are from shedding this monthly fee. When your loan is paid down to 80% of the home’s original value, you have the right to ask your lender to discontinue to insurance premium payments.
What Is The Loan-To-Value Ratio?
This ratio is the amount of mortgage debt in the form a percentage based on how much the home is worth. It’s calculated by the following formula:
Amount owed on the mortgage/Appraised value
This is an important factor when it comes to matters of PMI insurance, as it’s how the required loan payment percentages are calculated. If a home is worth $100,000 and $80,000 is still owed on the home, the loan-to-value ratio is 80 percent. This means the borrower can request the insurance be cancelled.
FHA Loans Have Different Requirements
If you secure an FHA loan, they require the payment of PMI premiums for the entire life of the loan. You can’t exactly cancel these insurance payments but you can refinance the loan in order get rid of the insurance. This means that you will no longer have an FHA loan.
Private mortgage insurance can be a nuisance, however as a first-time homebuyer with little capital, the fees may be worth it when you’re able to secure your first home.