Private mortgage insurance allows buyers to obtain mortgages without making a 20% down payment, with premiums usually added onto monthly mortgage payments; it isn’t tax deductible.
PMI may be cancelled when your loan-to-value ratio drops below 80% or by requesting a new appraisal.
It’s an insurance policy
If you are making less than 20% down on a conventional loan, PMI (private mortgage insurance) will likely be part of your mortgage payments and closing costs. Your credit score and amount put down determine your PMI rates while debt-to-income ratio plays a part. Some lenders provide discounted PMI rates for first time homebuyers or certain groups such as military personnel.
Your Private Mortgage Insurance (PMI) premiums should appear as a line item on both the loan estimate and closing disclosure document. They can be paid either upfront at closing, added to your monthly mortgage payment, or split into financed and non-financed premiums depending on how your lender structures their loan agreement. PMI protects lenders against losses in case you default, though not homeowners insurance which offers protection from foreclosure; to avoid PMI altogether you could make a larger down payment or apply for government-backed loans such as FHA, VA or USDA loans which do not require mortgage insurance premiums in this regard.
It’s not a penalty
There are various ways to sidestep PMI without increasing your mortgage rate, one being lender-paid mortgage insurance (LPMI). This type of loan allows you to buy conventional homes with as little as 3% down – though typically will come with higher interest rates.
Piggyback loans may also be an option; this form of mortgage combines your first and second loans into one with lower down payment requirements than would normally be necessary, making this an effective means of getting into your home sooner.
PMI doesn’t protect borrowers directly, but it does allow more people to buy homes sooner. Furthermore, it removes an important hurdle for those wishing to purchase properties but lacking 20% down payment funds.
It’s not forever
Once your loan balance reaches 78% of its original value or 50% of your amortization schedule, your lender must cancel private mortgage insurance (PMI). If you want this sooner than that, however, you must submit written request and pay for a new appraisal.
Many home buyers with limited cash for down payments utilize a piggyback loan as a way of avoiding private mortgage insurance (PMI), though this approach does not come without additional costs; you will likely incur costs such as broker price opinions or appraisals in addition to paying the monthly premiums.
If you want to avoid PMI, there are other options that may work better: conventional loans requiring less than 20% down or FHA and USDA loans without PMI requirements are both viable alternatives; just remember that they typically carry higher interest rates compared to traditional mortgage loans – so before making any final decisions be sure to weigh all costs against benefits before deciding.
It’s not required by law
While PMI doesn’t protect you from foreclosure, it can help you become a homeowner if your budget doesn’t allow for a 20 percent down payment. Your lender is required to provide an annual written disclosure outlining your rights when your principal balance reaches 80 percent of original or appraised value of property (in case of refinancing, new appraised value of property).
PMI applies only to conventional loans that meet the criteria set forth by Fannie Mae and Freddie Mac, two government-sponsored enterprises that back mortgages. These mortgages enable people with less-than-stellar credit scores or limited savings for down payments to still qualify for financing they otherwise wouldn’t. Depending on your loan-to-value ratio and insurance provider used, annual PMI costs can range between 0.3% to 2% of your original loan amount annually and be added onto your mortgage interest payments.