What is Private Mortgage Insurance (PMI) and why do you need it? PMI protects the lender in case of default on a mortgage. It is paid by the homeowner when the down payment on a home is less than 20%.
Many people perceive PMI as a terrible thing. I’ve always maintained that is in fact, a good thing. Rather than looking at it as some sort of punishment for not having a 20% down payment, it is better to look at it as providing buyers who would otherwise qualify for a mortgage the ability to buy a home with a smaller down payment. If borrowers had to wait until they’ve saved enough for a 20% down payment, there would be a lot fewer buyers. By some estimates, nearly half of all mortgages have some type of mortgage insurance. PMI enables you to buy a home with as little as 3% down.
The PMI rate you pay is closely tied to your downpayment percentage and your credit score. An excellent credit score will obviously garner the best rate and is much more reasonable than it was years ago. Conversely, it can be quite pricey for lower scores.
Now just because PMI is great for helping you purchase a home, it doesn’t mean you want to keep it forever and there are a few ways to get rid of it. The Homeowners Protection Act gives you the right to request the cancellation of your mortgage insurance when you reach the date when the balance of your mortgage is scheduled to fall below 80% of the original value of your home. (That may take a while) You can also make this request earlier if you have made payments that reduce your balance to 80% of the original sale price of your home. There are some conditions to this like having a good payment history and no junior liens on your home. Another option (and probably the most common one) is combining the appreciation in value of your home with the lower principal balance. Under this scenario, the current balance typically must be at 75% of the current appraised value or below and the loan is seasoned for at least 2 years. If it’s been 5 years, you need to only meet the 80% level.
So let’s keep PMI in perspective. If many borrowers had to wait until they saved a 20% downpayment, they may never be able to buy a home. PMI opens the door to these creditworthy buyers so they can realize the dream of homeownership, take advantage of tax benefits and the possible appreciation of real estate. That seems to me is a good thing.
Jay Domenic -Movement Mortgage 434-220-7630