What New Homebuyers Need to Know About PMI

Posted by Shawn Clayton on Friday, January 26th, 2018 at 10:28am.

What Is PMIThere is a little thing called PMI which can add to the cost of owning a home and in some cases continue for the life of a home mortgage loan. Buyers who are touring areas should note this potential extra cost as this can affect the style and size of the home that can ultimately be purchased. Your dream waterfront home may take a little more effort to lock down. But not every borrower needs to pay PMI but in some cases it is necessary to make these extra payments in order to be approved for a home mortgage by a lender. What do you need to know about PMI? Do you have to pay PMI? Learn more about PMI and your options today.

Does Every Borrower Pay PMI?

Private Mortgage Insurance or PMI is often necessary for those people not making a down payment of 20 percent. Those putting down less may be required by a lender to make extra payments as a form of insurance to the lender. This is because without significant equity at the time of a purchase, a lender sees a borrower as higher risk who will be more likely to default on a loan or file for bankruptcy and walk away from outstanding loans. PMI protects lenders and makes them more willing to approve such borrowers.

Not everyone needs to pay PMI. In addition, different mortgage products have different terms. Conventional home loans require PMI until 80 percent of home equity remains as the balance. At this point, borrowers can initial cancellation of PMI. This process is one of the ways for borrowers to get out of paying PMI slightly earlier. In comparison, borrowers who take out FHA loans are obligated to pay PMI for the life of the loan unless the loan is refinanced with a non-FHA product. Therefore, it makes sense to learn how long payments need to be made before accepting an offered loan.

Does PMI Benefit Borrowers?

PMI is an insurance that makes homeownership more accessible for many. That being said, PMI is a product that protects lenders. Payments do not go into building home equity in any Little Silver home and once PMI payments end, the money could go toward paying down the mortgage loan or be used to maintain or make upgrades in a home. Terms are not the same for everyone. Fees vary. Multiple factors, such as a borrower's credit score, may influence the interest rates offered. They may be tax deductions for those paying PMI or the PMI premium but this is not always the case.

How Do Borrowers Free Themselves from Paying PMI?

First of all, this depends on the mortgage product chosen. When it comes to conventional mortgage loans, lenders automatically cancel PMI once there is only a 78 percent balance on the home loan. What about that 80 percent mentioned earlier? There seems to be a 2 percent difference and that can amount to a significant amount of money depending on the purchase amount of a home. Buyers can request to cancel PMI earlier or when there is an 80 percent loan-to-value ratio. The onus is on the borrower to demonstrate proof with an independent appraisal. Increasing the value of the home with a home renovation project is another way some borrowers choose to reduce their loan-to-value ratio and get out of PMI early.

Do You Need to Pay PMI?

PMI is a requirement for some mortgage products and some buyers. Get around it by putting down 20 percent or investigate other options. Certain combination loans and VA loans, physician loans and some products through credit unions do not obligate borrowers to pay PMI. Speak with a lender to learn more about all applicable options and read the fine print.

Shawn Clayton, Owner/Broker, REALTORĀ®

Jersey Shores Luxury Home Expert

Contact Shawn

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