What is PMI and Why Do We Need It?
There is a line on homeowner’s mortgage statements, entitled “PMI.” PMI stands for “private mortgage insurance” and it can cost between $50 to $200+ per month. However, this will depend on the buyer’s loan balance and the homeowner’s PMI rate. PMI has the word “private” in its name because it is only offered to private companies and not government agencies or public mortgage lenders, such as the FHA and VA mortgage programs. A FHA and VA mortgage insurance plans do not have an expiration date, but a PMI does have an expiration, especially if homeowner’s meet certain qualifications.
A private mortgage insurance is designed to help protect mortgage lenders rather than buyers. When people apply for a mortgage, their lenders must protect their own investment, which means that they may not trust that you have enough equity to pay off your loan balance. In this case, they charge you a PMI, which means that you are approved for a mortgage and lender’s reduce their risks. Private mortgage insurance can be paid in monthly payment or in one upfront lump sum.
Not to be so hard on how PMI protects lenders, let’s look at how PMI benefits homeowner’s:
- annual payments – an annual payment plan allows homeowners to pay the PMI amount each year.
- monthly payments – the PMI is calculated annually and is added to the monthly principal and interest payments.
- up-front payments – if possible, buyer’s can pay all of the PMI at the beginning of negotiations.
Even though PMI gets a bad rap, it really helps qualified buyers to purchase their dream with its modest down payment plans.
How Much Is PMI?
If a potential homeowner is unable to make at least a 20% down payment on a home, they will be required to carry private mortgage insurance. Its cost can be from .20% to 1.50% of the loan balance each year, but these percentages are based on some criterias, such as a credit score, the down payment, and the loan terms. Your annual payment is divided into a 12 month premium payment plan and this amount is added to the montly mortgage payments. Remember, PMI is about protecting the lender, not the homeowner. This is why a mortgage loan company will talk you into continuing that coverage until the balance has been paid down and the property has appreciated enough to have between 20% to 25% equity. Lenders know that for first time home buyers, they very likely don’t have enough cash for a 20% down payment, thus homeowner’s pay PMI insurance.
Mortgage Calculator With PMI
There are many financial property search websites that can help potential homeowner’s figure out their monthly payments of a home mortgage loan. These websites offer a mortgage calculator with a PMI system for individual’s to see what their home mortgage loan will be based on the home’s sale price, the loan terms, the buyer’s down payment percentage, and the interest rate of the loan. A mortgage calculator with PMI information can also calculate property tax and its effect on the buyer’s monthly mortgage payment.
Buyers using an online PMI calculator, you will be asked to fill-in information that looks similar to the following:
Home Loan Request Form
- desired loan amount
- credit rating
- place of employment
- years at job
- mortgage balance
- type of property
- monthly payments
- annual household income
How Much Home Can I Afford:
- sale price of home
- percentage down
- length of mortgage
- annual interest rate
In using a couple of different PMI calculator websites, buyers can see the best interest rate for them and which loan is better. When one lender offers a loan with a lower interest rate and requiring a PMI payment versus, buyers can make better choices by comparing it with another lender who is offering a higher interest rate but without a PMI.
The Homeowner’s Protection Act of 1998 provides homeowner’s a removal of PMI when their home has reached 22% equity or 78% loan-to-value. At this point, the borrower’s can request a written PMI certification that their PMI be canceled. If a borrower is not current on their payments, the PMI must be automatically terminated when the borrower becomes current and cancellation occurs on the first day of the following month. If a buyer has a 30 year mortgage, it will take eight or ten years on average to reach the point where they can cancel the PMI insurance.
Mortgage lenders are required to cancel the PMI based on the following conditions:
- the borrower has a good payment history. If a borrower is not current on payments as of the termination date, but later becomes current, termination shall not take place until the first day of the following month;
- the mortgage-holder approved verification of the property value;
- the “certification” (generally an appraisal confirming that the value has not declined since the property was purchased) that the property’s equity is unencumbered by a subordinate lien.
PMI – Pay If Off Early
Yes, there are methods that homeowner’s can use to pay off their PMI sooner:
- Naturally, if a buyer pays down their mortgage by 80%, then they can request that the PMI be canceled.
- Buyers can perform home improvements to increase its value and then have it reappraised. If the amount remaining on a mortgage is 1.25 less than the new appraised value, then buyers can request that the PMI be canceled.
- Speaking again of reappraisement, if home prices have increased in your area since you purchased your home, then have your home appraised anew. Like the same remaining amount above, if your mortgage is 1.25 less, then request that your PMI be canceled.
- If possible, pay your loan in half the number of years that you originally agreed to, i.e., 15 years on a 30 year mortgage.
- Pay extra toward the principal
There are pros and cons with anything, including paying for private mortgage insurance. However, if a buyer does not have a significant down payment, then a PMI helps fulfill their hope of buying a home. It is best to do your research first to help you understand the terms of your mortgage contract and you need to calculate your loan to value ratio to keep from paying it longer than is necessary. Also, as identified above, it is important to know when and how to remove PMI to lower monthly mortgage payments.