When Do You Need Private Mortgage Insurance?
In most cases, you need private mortgage insurance, seen in the mortgage calculators as PMI, if you make a down payment of less than 20% of the home’s listing or purchase price. Many lenders will require this mortgage insurance in case borrowers are forced to default on the home loans.
The FHA makes PMI mandatory when home owners put down less than 20%, as government loans often only require a low 3.5% down payment for home purchase.
Also, it is important to check your credit reports for accuracy as both credit scores and down payment amounts determine the PMI fees. In order to estimate the overall costs, you’ll first need to figure out whether you have good or bad credit through your credit reports and it’s best to refer to the nation’s top three bureaus – Equifax, Experian, and TransUnion.
How Much Are PMI Fees?
Private mortgage insurance fees will vary depending on the size of your downpayment, credit score, and the actual home loan amount you need. The premiums for your PMI will most likely be included in your monthly mortgage payments although in some cases you may pay a large sum of this upfront.
Average PMI rates typically range between 0.3 and 1.15% of the annual loan amount. Oddly enough, some years the IRS allows you to make your PMI premiums tax deductible and in other years they are not. This really depends on what Congress decides and your accountant or tax preparer will be able to advise you of any changes.
While you end up paying for a PMI with your mortgage payment each month, having this mortgage insurance will allow you to make your home purchase with a lower down payment, which means you’ll be able to get the home you want at an initial lower cost. This is extremely helpful for people who can’t afford large down payments currently but wish to become home owners immediately. Statistically, this makes up most first time buyers who are generally younger and less financially established.
How To Get Rid of Private Mortgage Insurance
Even though your PMI premiums will be included in your mortgage payments, you don’t have to keep it throughout the length of the loan itself. In many cases, lenders will simply cancel the insurance if you’ve reached the desired 20% repayment threshold of the loan and achieved that level of equity in your home.
Additionally, you should know that it is mandatory for all lenders to cancel PMI policies as soon as you reach 78% of the loan-to-home value. If the loan-to-value ratio drops to 80%, you may request that PMI be cancelled as well. This means that once you have almost 80% equity in your property, there is no reason that you should be charged for private mortgage insurance each month.
Loan-to-value ratio (LTV):
This is a financial term that describes the amount owed on a mortgage as a percentage of how much the property is worth.
The basic formula for this is: Amount Owed / Appraisal Value
$70,000 = Amount owed on home loan
$100,000 = Appraisal value
LTV = 0.70 or 70%
The current FHA mortgage options may differ, however, as many these days require that you pay the premiums throughout the loan. The exception to this would be to refinance after you gain 20% equity in the property.
Remember, it’s imperative that you first review your credit scores and reports before applying for a mortgage. This knowledge will help you understand your credit and whether you will be responsible for future PMI payments.