PMI makes homeownership possible for many individuals who would not otherwise qualify, yet relying solely on it can be risky; to reduce PMI use make a larger down payment and make sure there is sufficient equity.
Your lender will inform you about available PMI policies and the amount to add onto the principal in your Loan Estimate and Closing Disclosure documents.
What is PMI?
PMI costs can be found with most conventional loans that serve to protect the lender in case of foreclosure, insuring their loss at 0.5% to 2% annually depending on a number of factors including down payment amount, mortgage amount, credit score requirements, type of loan loan term etc.
Borrowers must typically continue paying PMI until they have amassed enough equity in their home to cover the loan principal; many lenders require proof of at least 20% equity before cancelling PMI.
Avoiding Private Mortgage Insurance can be achieved through making a larger down payment that brings your LTV ratio below 80% and choosing an FHA or VA mortgage that doesn’t require PMI. Furthermore, refinancing may allow you to do away with it altogether although an appraisal fee might apply before being subject to up-front premium fees to restore 20% equity requirements.
What is the LTV Ratio?
Lenders use the Loan-To-Value ratio (LTV ratio) as one of the key criteria when reviewing mortgage applications. It is calculated by dividing the loan amount borrowed by its appraised or purchase price value and multiplying by 100.
Low loan-to-value ratios translate to reduced lender risk and thus, lower PMI premiums. That is why most conventional lenders require at least 20% down payments as minimum requirements and charge PMI if buyers make smaller down payments or have poor credit.
Assuming your mortgage servicer does not penalize prepayments, one way to decrease your LTV ratio and decrease its risk is through making larger down payments and increasing equity quickly in your property – giving instant equity and making yourself a lower-risk borrower. Otherwise, extra payments might help chip away at principal and potentially decrease LTV ratio enough that your lender removes PMI once your equity reaches 20% equity in your home.
How much is PMI?
PMI, commonly referred to as mortgage insurance premium, costs vary depending on a number of factors including loan size, down payment amount and credit score. On average it costs between 0.5%-1.0% annually of loan total.
Financial institutions typically offer two choices for mortgage insurance premiums – upfront or monthly premiums – to give borrowers a clear idea of their costs before closing day. Your lender should provide you with a loan estimate and closing disclosure to get this information.
Buyers can save on PMI by opting for a more cost-effective home, waiting until they save enough down payment savings, and qualifying with good credit to secure lower PMI rates. Most mortgage lenders will cancel PMI when your original appraised value reaches 78% or halfway through your loan’s term – however you can request cancellation at any time yourself if desired.
Can I get rid of PMI?
As soon as your home reaches 20% equity, you can request that your lender cancel PMI. However, to demonstrate this step accurately and cost effectively, an appraisal may be required to demonstrate this increase in value – be prepared! Alternatively, if this process seems like too long of a wait for you, request cancellation after two years instead if you have had strong payment history and made substantial improvements to the property.
No matter which option you select, it is crucial to build up home equity quickly in order to eliminate extra monthly payments and interest charges of PMI as soon as possible – this will save thousands over the life of your loan! Furthermore, improving your credit score could enable you to qualify for lower mortgage rates, further reducing homeownership costs. When buying a house be sure to discuss PMI costs with your mortgage lender prior to closing day.