Mortgage Talk - How PMI Works

All about Private Mortgage Insurance...
Frank Merola is Executive Mortgage Banker for William Raveis Mortgage LLC.

When you buy a house and make a down payment of less than 20 percent, the banks and lender’s usually require you to buy mortgage insurance. The purpose of the insurance is to protect the mortgage company if you default on the mortgage.

Mortgage insurance is also known as “PMI” or Private Mortgage Insurance. Typically this is paid monthly as part of your mortgage payment.

How much you pay for PMI depends on the loan program, your credit score and your loan to value. Some loan programs like FHA and USDA charge the same premium to all borrowers. This premium is multiplied by your loan amount and divided by 12 months to determine your monthly PMI payment.

Some loan programs, like Veteran’s Loans, have no PMI!

A general rule of thumb is that the more you borrow and the lower your credit score, the higher your monthly PMI premium will be. The closer you get to 20% down and excellent credit, the lower the monthly PMI.

The good news about PMI is that you can remove it after you have met some conditions.

Normally once you have PMI you will have to pay it for at least two years. Typically to remove PMI you have to have at least 20% equity in the home. You can ask your bank or lender to cancel the PMI when your mortgage balance is 80% of the original appraised value. When the balance drops to 78% they are required to remove it.

FHA loans act a little differently.  With  the FHA loan, the PMI is for the life of the loan and you have to refinance into a non FHA loan to remove PMI. FHA loans have upfront PMI that is normally rolled into the mortgage and monthly mortgage insurance.

The other good news about our Cape Cod housing market is that we have seen real estate values go up in the past few years. Some lenders, banks and mortgage servicers may consider a new appraisal to assist you with removing PMI. This may only cost you $400-$600 and is cheaper than refinancing. You will want to discuss this with your bank, lender or mortgage servicer to see if they allow this option.

There is also a new option for home buyers to ‘buy out” their PMI upfront by making a one time payment at their closing. What this does is eliminate the monthly PMI. It iis a good option for people who have extra cash, but want a lower monthly payment.

In the past few years we have seen a program called LPMI or lender paid mortgage insurance be a popular program. This is where the borrower’s interest rate is higher, but the loan does not  have a monthly PMI payment. Because the rate is higher and PMI eventually drops off, this is a good option for home buyers who only plan on staying in a home for maybe 7-10 years.

Frank Merola

Executive Mortgage Banker

NMLS Mortgage Loan Originator ID: 1020051

William Raveis Mortgage LLC NMLS ID #2630

Cell 508-740-5922

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