Those who are planning to buy a home with a down payment lower than 20 percent might already have familiarized themselves with the term “private mortgage insurance.” What really is PMI and how does your down payment affect it?
Understanding Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is an affordable mortgage option that lenders used to protect themselves from financial loss in case the home loan is defaulted on. PMI is also required if a person refinanced his or her mortgage with less than 20% equity. Simply putting it, private mortgage insurance is a layer of protection for mortgage lenders and an additional cost for borrowers.
So how does your down payment affect your PMI?
Let’s put it this way:
When applying for a home acquisition, you will be required to pay for PMI when you make a down payment of less than 20 percent. The policy is specifically required if the LTV or loan to value ratio goes up to 80 percent. If you want to avoid private mortgage insurance, you have to make a bigger upfront investment.
The 80 Percent Factor
Mortgage loans are eligible to discontinue private mortgage insurance as soon as the loan to value ratio spikes at 80%. How would you achieve it? Simply by getting the home reappraised at a higher percentage or paying down your loan. Lenders are not required to remove or reduce PMI until the balance drops to 78% – if you want the PMI removed as soon as you have 20% equity in to your home, you’ll have to request the cancellation.
But, if you are really determined to avoid paying PMI even when your down payment is below 20%, don’t despair. Lenders provide other options for which they’ll identify your eligibility. Some waive their private mortgage insurance requirement if a borrower pays a higher rate of interest on the loan.
20 Percent Down Payment Is Not Always Required
Contrary to some beliefs, you don’t necessarily have to put down 20% when purchasing a residential property.
The real estate market wants everyone to make the process a bit simple especially for those with a tight or restricted budget. Nowadays, you can find some mortgage financing options – allowing for a smaller down payment. Some non-government insured, or conventional loans, allow for as low as 3 percent down payment, while the FHA loan program gives borrowers the advantage of making a down payment for as little as 3.5 percent.
Private Mortgage Insurance Costs Can Increase Quickly
Keep track of your home equity if you’re payingPMI. Pay only as long as you have to. Conduct a thorough research before making a final decision with regards to your loan plan. As possible, do not just focus on a single option. Explore and compare. This way, you’ll be better prepared to choose the right loan option for you.
Understand Your Options
Buying a home is never a joke. The process is complicated – from the designs and style of the house to the costs including the PMI. If this is your first time to purchase a house, it makes more sense to work with a mortgage expert.
This professional will help you throughout the process, helping you know your rights as a borrower, the costs associated, and many other important things you need to get your dream house. They can also help you understand your numbers as well as their effect on your private mortgage insurance and your overall monthly payment. Schedule a consultation for factual support and guidance.