If you are buying a home chances are the topic of PMI has come up, and you’ve wondered what it is.
PMI stands for Private Mortgage Insurance, and is an extra fee built into your monthly mortgage payment designed to protect lenders against foreclosure costs. The protection is provided by third-party PMI companies, which work in a way that is similar to other types of insurance companies.
PMI is calculated on a sliding scale based on your LTV (loan-to-value) and your credit score and generally speaking, the more money that you put down when buying your house, the less PMI you will have to pay. So if you put down 15%, you could expect to pay less than if you put down 5%. The general range for PMI factors is .25% to 2%. If you really want to see what a PMI chart looks like, here is one — confusing!
And here’s something else you might not know… not all loans require PMI.
PMI is usually only required when the buyers contributes less than 20% of a home’s price. So the easiest way to get out of paying PMI is to have a sizeable down payment. Don’t have 20% to put down on your new home purchase? You still may be able to avoid paying PMI if you are smart enough to ask your lender about your options.
Many lenders have loan programs where the lender will actually pay the mortgage insurance for you in exchange for a higher interest rate. The industry term for this is LPMI. So for example, if you were able to get an interest rate of 6% paying PMI, you may be able to find an interest rate of 6.5% with LPMI and have a cheaper payment each month than if your rate was at 6%.
You read that right — it is possible to have an overall lower payment with a higher interest rate because the higher interest rate may actually be cheaper than paying PMI.
So ask your loan officer what kinds of LPMI options might be right for you — and possibly save yourself some money.
Lastly — if you are in a loan program where you are paying PMI each month and you think you have more than 20% equity in your home, call your lender and ask them about what it takes to avoid paying PMI each month. Each lender handles the PMI cancellation process a little differently — but in general you should expect to pay for an appraisal, fill out some paperwork and turn it in to the lender and once they see that your total mortgage balance is 80% or less than what your home is worth, they will generally cancel it.
During the big Arizona real estate run-up, it wasn’t uncommon to hear stories of people’s homes appreciating 20% per year — and I actually saw a few situations where the lender wouldn’t cancel PMI because they hadn’t lived in the home for more than 2 years. In those cases, the best option was just to refinance because the new lender would generally go with the current homes value and not the value that you bought the home at when calculating whether or not PMI was needed.
In any case, the rules for canceling PMI vary by lender — so the best way to avoid paying PMI when you don’t need to is to pick up the phone and call!