What You Need to Know About PMI
Several home loan programs allow you to purchase with less than 20% down. If you take advantage of a low down mortgage, however, be prepared to pay private mortgage insurance (PMI).
This may seem like a small price to pay to get your foot in the door and start building equity. But it’s important that you fully understand how mortgage insurance works. This extra cost is included in your mortgage payment each month and it affects how much you’re able to spend on a property.
What is Mortgage Insurance?
Mortgage insurance is required on most home loans with less than 20% down and it protects mortgage lenders against loss if a borrower defaults.
PMI premiums vary. If you apply for a conventional loan, your down payment and your credit score determine how much you’ll pay in private mortgage insurance. Typically, annual premiums with a conventional loan are between 0.50% and 1.00% of the loan amount.
Mortgage insurance is required on all FHA loans. Premiums range from 0.45% to 1.05% of the loan amount, depending on loan size and loan term.
How Mortgage Insurance Helps You?
Mortgage insurance allows you to buy a property sooner, instead of waiting until you have a 20% down payment. Let’s say you have your eye on a property that costs $200,000. If you can only save $5,000 a year, it would take about eight years to save the $40,000 that would be required for your 20% down payment. That’s eight years of renting and not earning any type of equity. Mortgage insurance puts homeownership within reach, and puts you on the path toward a greater net worth (as long as market conditions remain positive).
How Can You Get Rid of Mortgage Insurance?
Since mortgage insurance increases a mortgage payment, many borrowers look for ways to eliminate this expense. The good news is that mortgage insurance isn’t permanent on certain types of loans.
If you get a conventional home loan with PMI, we’ll drop this insurance once your property has 78% equity. Or, you can request removal of private mortgage insurance once the property has 80% equity based on its original value. The latter involves a home appraisal at your expense.
If you use FHA financing to purchase a home with less than 10% down, mortgage insurance is required for the life of the loan in this circumstance. If your down payment is greater than 10% on an FHA loan, your FHA loan will carry a mortgage insurance premium for 11 years. Again, in this circumstance you could refinance your loan once your equity position reaches 78% to eliminate your mortgage insurance payment.
While refinancing is an option to get rid of your mortgage insurance premium, it’s also expensive. You must apply for a new mortgage and qualify for financing. Because you’re creating a new mortgage, you’ll also pay closing costs again.
If you choose to refinance, it’s a good idea to wait until interest rates are low. Also, estimate how long you plan to live in the property and then examine how long it will take recoup your closing costs. For example, if you pay $4,000 in closing costs to refinance and reduce your mortgage payment by $350, you’ll need to live in the home for at least 12 months just to recoup the $4,000 it cost to refinance.
Mortgage insurance can help you purchase a property, but premiums are costly and add up over the years. To get rid of mortgage insurance faster, make an extra principal payment whenever possible to pay down your balance and build equity quicker.
Whether you’re thinking about a new purchase or refinancing your current loan, we can help you find the right home loan program for a specific needs. Give Cherry Creek Mortgage a call and let our knowledgeable loan experts assist you.