Lenders offer mortgage insurance to reduce the risk of default on home loans. The premium typically becomes part of your monthly mortgage payment. Ask your lender for an outline of all the costs over different timeframes and loan options that would work for you.
One way to cut PMI costs quickly and easily is making a larger down payment, though this may prove challenging. Otherwise, request that it be cancelled once your mortgage balance reaches 80% of its original value.
It’s an insurance policy
Mortgage insurance provides lenders with protection in case you cannot make your monthly mortgage payments on time. The premium for this policy typically forms part of your escrow account payment along with homeowners insurance and property taxes.
PMI premiums range from 0.46 percent to 1.5 percent of your loan amount and are not tax deductible; your monthly premium depends on how well it represents both the balance on your mortgage account and home’s current market value.
Your loan balance falls below 80% of its original value or when equity levels reach 20% in your home, at which time PMI cancellation can be requested by submitting a written request and paying an appraisal fee. In order to be eligible for PMI cancellation, all mortgage payments must be current with no junior liens on your home; your Ally Home loan expert can help explain how PMI works and which strategy would make the most sense financially for you.
It’s a requirement
PMI premiums typically range between 0.5% and 1% of your loan’s original amount each year, although they may differ depending on its size, value, and creditworthiness. As larger mortgages pose more of a risk for lenders, their PMI premium will naturally increase with each additional mortgage taken out.
Your lender will consider various aspects of your loan when calculating how much PMI to charge you; adjustable rate mortgages (ARMs) often come with higher PMI rates compared to fixed-rate loans, while your loan-to-value (LTV) ratio also plays a part.
Ideal, saving enough for a 20% down payment on your mortgage to eliminate PMI completely is ideal, however that’s not always achievable. In such instances, when building 20% equity you may request to discontinue PMI altogether once an appraisal confirms this equity – however this process requires following certain procedures and can take years!
It’s a cost
There are various strategies you can employ to avoid private mortgage insurance (PMI), including making a larger down payment or getting a piggyback loan. Refinancing may also provide relief; but be sure it will be worth your while first!
Conventional mortgages that meet Fannie Mae and Freddie Mac standards typically require private mortgage insurance (PMI). The premium, which typically ranges from 0.3% to 2% of your loan amount annually, protects lenders in case of default on your mortgage loan.
PMI may be paid as part of your upfront closing costs or added to monthly payments as a “split premium.” Your lender should calculate and include this figure on your estimate and closing disclosure forms; once your loan balance has reached 80% of its original value or you have 20% equity, PMI could potentially be cancelled.
It’s not forever
As is required by federal law, most lenders automatically cancel your PMI once you reach 20 percent equity in your home provided that payments continue on time.
As part of your plan to eliminate Private Mortgage Insurance (PMI), extra payments on your mortgage or sending checks directly to lenders in order to have additional amounts applied directly towards principal can help speed up this process. You may even request early cancellation once your principal balance reaches 80% or you reach midpoint of your mortgage term, and request cancellation.
PMI is an essential cost of your conventional mortgage, yet it does not protect you or protect against foreclosure personally; rather, it safeguards only against financial loss for the lender.