Private mortgage insurance (PMI) helps home buyers move into a home without putting down at least 20%. Some financial experts think paying for PMI is ok if it means you can move into a home years sooner and stop paying rent. But others say that PMI is an unnecessary expense and should be avoided at all cost.
Let’s Start with Really Helping Homeowners Know their Rights to Prevent Unwarranted PMI Payments.
To make America great again, some argue we should try to avoid paying for PMI as much as possible. If millions of people stopped paying PMI today, they would have thousands of more dollars in their pockets every year. That money could be injected into the economy with more purchases. So, it is definitely a goal worth pursuing!
Steps to Take to Avoid PMI
The first choice is to come to the closing table with at least 20% down. If you have 20% equity in your property, you will not need to pay for pesky mortgage insurance.
If you cannot do either of those, there are some other options. Some lenders have lender paid mortgage insurance or LPMI. It is similar to PMI, but the lender pays the cost. This will involve paying a slightly higher rate for the life of the loan. To pay your PMI for you, the lender will require you to pay as much as .75% more on your interest rate.
Consider this option with caution; if you are staying in the home for 20 years, you will pay a higher rate for every year. This adds up to tens of thousands of dollars in additional interest.
Another possibility is to use piggyback financing. In this situation, the buyer brings a 10% down payment, and takes out an 80% mortgage and a 10% mortgage. This is known as an 80/10/10 loan.
How to Stop Paying PMI
Once you have a PMI payment, you want to get rid of it as soon as you can, so you can put that money to use for other things – making America great again, remember?
Generally, you can cancel your PMI once the principal balance drops to 80% of the value of the home. This can be the original appraised value or the current market value.
There are some restrictions, however. Depending upon the lender and the PMI provider, you could be asked to show a history of on time payments. Usually, you need to show at least a year of payments that were on time. Also, you should not have a second mortgage on the home.
Lenders have requirements to meet as well. They are required by the Homeowners Protection Act of 1998 to update you each year on how you can cancel PMI. Lenders are required by this law to terminate your PMI when you have 78% loan to value. You do have to be current on your mortgage when you get to 78% LTV to have PMI taken away. If you are not current, the PMI will be terminated on the first day of the first month you are current on the loan.
The Homeowners Protection Act of 1998 also states that you can request PMI cancellation after you get to 80% LTV based upon the original value of the home. But in this case, you need to contact the lender to have the PMI removed.
What Does PMI Costs?
PMI costs vary depending upon the level of risk you present to the lender. The smaller the down payment, the higher the PMI costs will be. Generally, PMI costs from .30% to 1.15% of the balance of the loan each year. The rate you have is based upon the credit score. Other factors are the percentage of down payment and the term of the loan.
PMI costs are usually monthly and are divided into 12 installments per year. This is added to the mortgage payment each month.
Note that the cost of PMI can change every year. This is based upon the mortgage insurance provider and state laws. So you can check with your lender to determine what your PMI costs will be for the next year.
If you are worried about the expense of PMI, just remember that it is helping you to own a home much faster than you would have otherwise been able to. Also, just focus on paying down on your mortgage so that you can get to 20% equity. Once you have gotten there, you can request PMI to be removed. And once you have PMI off of your monthly mortgage, you will have an extra $100 or $200 per month to use as you wish, so that you can help to make America great again!