Private mortgage insurance also referred to as PMI is insurance that the lender uses in case the borrower defaults on a home loan and there is not enough equity in the home to put the lender in a positive spot.
Most loans require private mortgage insurance if the borrower puts less than 20% down on a home. These fees can vary depending on the size of the down payment, the credit score, and the terms. Typically they are around .3% to 1.5% of the original loan amount each year. Most of these policies require the borrower to pay monthly for the mortgage insurance but some borrowers may also have the option of paying for mortgage insurance with a large upfront payment.
Something that many first-time homebuyers don’t realize is that PMI can be canceled if the loan balance drops to 78% of the home’s original value. This typically takes anywhere from 1 to 5 years. It’s a good idea for homeowners to keep track of their payments when the loan balance reaches 80% of the home’s value you can ask the lender to discontinue the mortgage insurance premiums. Lenders should automatically remove the private mortgage insurance when the loan-to-value ratio drops to 78% but it can be requested to be removed when the value is at 80%.
There are ways to avoid mortgage insurance and then you don’t have to have that extra payment with your monthly mortgage payment each month. Reasons to avoid include cost, private mortgage insurance is only deductible if the taxpayer earns less than $110,000 per year as a couple and they can be hard to cancel once you’ve got it. Canceling PMI is not as easy as simply stopping the payment. Many lenders require that the homeowner draft a letter requesting that the insurance be canceled as well as a formal appraisal of the home. It could take several months to actually get PMI canceled. Also, PMI tends to get forgotten about so you could be paying years on the insurance once the value is actually at 80%.
Consider paying this mortgage insurance upfront if possible and then you won’t have to worry about it being amortized over 25 or 30 years. The best way to avoid it altogether if the simply make a larger down payment if possible. For more information on coming up with a down payment to avoid private mortgage insurance please contact me at any time or browse the website for more tips and information on homes, buying, finance and the Irvine real estate market.