For many people, purchasing a house represents the ultimate expression of freedom and financial stability. Unfortunately, saving up for that down payment is not always easy – especially if you're starting.
But don't fret; PMI (Private Mortgage Insurance) can make financing your first home more manageable. In this blog post, we'll explain exactly what PMI is, how it works, and why – or why not – everyone needs to pay for it when buying a house. Read on to learn all about the benefits and drawbacks of Private Mortgage Insurance.
What is PMI, and what does it stand for?
PMI stands for Private Mortgage Insurance. Lenders take out an insurance policy to protect themselves from loss if a borrower defaults. The borrower usually pays the PMI cost, which is typically added to their monthly mortgage payments.
Lenders require borrowers to purchase PMI when they have a down payment of less than 20% of the home's purchase price. This insurance protects lenders in case a borrower defaults on their loan, and it helps cover any losses that may occur.
How Does PMI Work?
When you take out a mortgage, the lender usually requires you to have Private Mortgage Insurance if your down payment is less than 20 per cent of the home's purchase price. The lender will then add a monthly premium to your mortgage payment to cover the insurance cost.
The amount of PMI you pay is determined by factors such as your credit score, loan-to-value ratio, and loan term length. Private Mortgage Insurance also helps protect lenders from losses if you default on your loan.
Does Everyone Need to Pay for PMI?
Only some people need to pay for Private Mortgage Insurance, as it depends on whether or not you have a down payment of 20 per cent or more. If you don't have the full 20 per cent down payment, most lenders will require you to purchase PMI.
However, there are some circumstances where you can avoid paying PMI, such as making a larger down payment or meeting certain criteria. It's important to talk to your lender about your options.
What is the PMI rate?
The cost of private mortgage insurance (PMI) is based on the loan-to-value ratio, credit score, and other factors. Your PMI rate will depend on these factors and the type of loan you have chosen.
Generally speaking, the higher your loan amount and loan-to-value ratio, the higher your PMI rate will be. In addition, certain types of loans, such as adjustable-rate mortgages or jumbo loans, may carry higher PMI rates than other loan programs. Your lender can provide a more detailed breakdown of your specific PMI rate.
How much does PMI cost each month, on average?
The cost of PMI varies based on the loan amount, credit score, and other factors. Generally speaking. However, it can range from 0.3% to 1.15% of the total yearly loan amount. If you take out a $200,000 mortgage with an annual interest rate of 5%, your estimated PMI payment could range from $60 to $230 monthly. Your lender can provide an exact estimate of your PMI cost based on the specifics of your loan.
What are the benefits of paying PMI?
The primary benefit of paying PMI is that it allows people who may have a partial 20 per cent down payment to purchase a home without taking on more debt. This makes homeownership more attainable for those with different financial resources than others. Additionally, PMI can help protect borrowers from incurring losses if they default on their loans.
What are the drawbacks of paying PMI?
The biggest drawback to paying PMI is that it can add to your monthly mortgage payments and increase your overall cost of homeownership. Additionally, if you can make a 20 per cent down payment, you may be able to avoid paying PMI altogether – although not everyone has the financial resources to do this.
Additionally, you may be able to cancel your PMI coverage once you reach 20 per cent equity in your home, but this varies by lender and loan program.
How can you avoid paying PMI altogether (if you're eligible)?
If you can make a down payment of 20 per cent or more, then you should be able to avoid paying for PMI altogether. Additionally, depending on the specifics of your loan program and lender, you may be eligible for other programs that allow you to avoid PMI altogether.
It’s important to talk to your lender about the options that may be available to you so that you can find the best way to finance your home.
What happens if you stop paying your PMI payments mid-way through your loan term?
If you stop paying your PMI payments mid-way through your loan term, then the lender may take steps to collect the past due amount. This could include taking legal action or repossessing the property if necessary.
Additionally, not making PMI payments can hurt your credit score and make it more difficult for you to obtain financing in the future. Keeping up with your PMI payments is important to avoid potential negative consequences.
How do you cancel your PMI coverage?
The process for cancelling your Private Mortgage Insurance (PMI) coverage depends on the specifics of your loan program and lender. Generally speaking, you can cancel your PMI coverage once you reach 20 per cent equity in your home.
If the value of your home increases or you make extra payments to reduce the outstanding balance on your loan, you can cancel your PMI coverage. It’s important to talk to your lender about the options that may be available to you so that you can determine the best way to cancel your PMI coverage.
What happens if I stop paying PMI?
If you stop paying your PMI payments mid-way through your loan term, then the lender may take steps to collect the past due amount. This could include taking legal action or repossessing the property if necessary.
Additionally, not making PMI payments can hurt your credit score and make it more difficult for you to obtain financing in the future. Keeping up with your PMI payments is important to avoid potential negative consequences.
FAQS
What is the PMI fee?
The PMI fee is the amount you pay your lender each month to cover the cost of Private Mortgage Insurance (PMI). This fee typically ranges between 0.3-1 per cent of the total mortgage loan but can vary depending on the specifics of your loan program and your financial situation.
Generally speaking, PMI fees are paid monthly until you reach 20 per cent equity in your home.
Does PMI cover the entire loan amount?
No, PMI does not cover the entire loan amount. Typically, it is used to cover a portion of the cost of your loan, typically between 0.3-1 per cent of the total mortgage loan amount.
PMI typically only covers the loan portion greater than 80 per cent of your home’s value. In other words, if you can make a 20 per cent down payment, then the majority of your loan will not be covered by PMI.
Do you never get PMI money back?
No, you typically do not get PMI money back. Once you have paid the total amount of your PMI fees, they are gone forever. However, if you reach 20 per cent equity in your home, you can cancel your PMI coverage and stop making future payments. It’s important to talk to your lender about your options.
Conclusion
PMI can be a great way to access homeownership, but the cost can increase quickly. We have explored what PMI is, who pays it and how they pay it-but ultimately, this decision is personal. Take your time, analyse your options, and make an informed decision that fits your financial situation best.
