Private mortgage insurance is a type of insurance used with conventional loans. This coverage is provided through private insurance companies. It protects the lender if you miss payments on your home loan.
In general, for conventional loans through a private bank, if you do not have at least a 20% downpayment, lenders will require that you have private mortgage insurance. The most common way to pay for your PMI’s monthly premium is with your mortgage payment. You will continue to pay the monthly premium until you have at least 20% equity in your home. Another option may be to pay it all in a lump sum during closing.
For government loans, such as FHA loans, mortgage insurance is known as MIP (mortgage insurance premium). This insurance may be required for the entire duration of the loan. You will need to see if you are eligible to cancel the mortgage insurance on your loan.
Many factors affect your PMI premium.
Typically, the lower your downpayment and the lower your credit score, the higher the PMI. The less equity you have in the property and the lower your credit score are unfortunate indicators that you have a higher risk of defaulting.
Furthermore, the type of loan you have also impacts the cost. Adjustable rate mortgages generally have higher PMI premiums.
PMI is intended to protect the lender. For example, let’s say you take out a loan with a 10% downpayment on a $200,000 property. Unfortunately, you have a financial hiccup, and you begin missing your mortgage payments. After foreclosure, the private mortgage insurance will then pay the lender the remaining 10%, or $20,000. Remember, the lender will always get back 20% equity in their investment – through your downpayment or PMI.
It is apparent that you do not benefit from PMI in any way. As a result, if you can save the full 20% downpayment, you can avoid the extra cost. Plus, with a 20% downpayment, you may also receive a lower interest rate.
Once you have 20% equity in your home, you may be able to cancel your private mortgage insurance. This will lower your monthly payment and help you save money every month. Unfortunately, this will not happen automatically.
You will need to contact your lender. For a $200,000 home, you are obligated to have paid down $40,000 on the principal. This number excludes the money in your monthly payment that went towards interest, taxes, and PMI. Your lender may also require a home appraisal to verify your 20% equity against its current market value. The assessment may cost you a few hundred dollars, but you will likely save that money in future PMI premiums.