Your down payment and credit score both play an integral role in determining how much PMI premiums you must pay; lenders typically offer lower premiums to those with established track records of repaying debts on time.
Your lender will include PMI details in both your loan estimate and closing disclosure documents.
It’s a type of insurance
PMI often gets a bad rep, but it is an integral component of many mortgage loans. PMI allows homebuyers who might otherwise struggle to save up enough money for a 20% down payment to get into homes faster while at the same time building equity more rapidly compared to waiting.
An individual’s loan-to-value ratio will have an effect on their monthly mortgage premium payment and closing disclosure; alternatively, there may be options to pay an upfront premium or annual lump sum payment at closing with each option having different cancellation conditions and restrictions.
It’s required by law
PMI may be avoidable entirely if you make a substantial down payment or refinance before your LTV reaches 80%.
Your credit score also plays a part in how much mortgage insurance premiums cost; the higher it is, the less risk you pose to lenders and therefore cheaper the premiums become.
Your lender may add the monthly mortgage insurance premiums directly into your loan payments; these will appear as line items on the Loan Estimate and Closing Disclosure document. Alternatively, an upfront premium could also be paid at closing.
By law, your lender must automatically cancel PMI when your outstanding balance reaches 78% of original property value (or loan-to-value ratio reaches 80% if financing with amortizing loans). However, you can request early cancellation by making your request in writing.
It’s a good idea
PMI can be beneficial as it encourages more people to enter homeownership more quickly, which helps them build equity faster for future investments like renovations or paying off high-interest credit card debt faster.
Mortgage insurance costs depend on several factors, including your down payment size and credit score. Although mortgage insurance is necessary in some instances, you don’t need it as part of a deal if your down payment exceeds 20% on the purchase price of your home.
Once you reach 80% equity in the property, you may request that your lender cancel mortgage insurance – though to do this they may need an appraisal performed to verify this fact.
It’s not a good idea
This insurance is not designed to protect you as the borrower but instead serves to indemnify lenders and investors from losses if you default on your mortgage and it goes into foreclosure.
Fannie Mae and Freddie Mac, two government-sponsored enterprises that back most conventional mortgages, require that conventional loans meet certain criteria in order to be eligible. It also helps homebuyers who cannot afford a 20% down payment qualify for loans that would otherwise not be possible.
PMI typically costs 0.3%-2% of your loan amount annually and should be added onto your monthly mortgage payments along with property taxes, homeowners insurance premiums and interest.
Thank goodness there are ways to avoid unnecessary costs! One proven approach is working towards paying down your mortgage until 80% equity has been reached; then calling your mortgage servicer to cancel PMI (or waiting until it automatically cancels once this level has been reached) becomes possible.