Homeowners in Chugiak may be required to take out and make payments on Private Mortgage Insurance or PMI. This is an additional expense for those who cannot afford to create substantial equity in a home at the time of a purchase. As part of a specific mortgage product, PMI may be required until a specific percentage of equity is reached or for the life of the mortgage product. Therefore, it is important to know more about PMI and related stipulations as it pertains to a mortgage product before taking out a home mortgage loan.
Understand more about PMI and when it is necessary today.
What Is PMI?
PMI is a type of insurance that protects lenders when there is insufficient equity on a home. This often comes into play when homebuyers cannot afford to make a 20 percent down payment. Buyers should know that PMI payments do not go toward building home equity.
All PMI fees are not the same. Variants, such as an applicant's credit score, may be used to determine interest rates on PMI. In addition, tax benefits, such as tax deductions on the PMI premium, have changed in the past. PMI can be applied on a conventional loan and will no longer be required once a certain amount of equity has been established.
This is not the case for PMI on other mortgage products, such as an FHA loan. Therefore, those who are looking to make a small down payment and explore a range of mortgage products should understand the additional PMI payments that may be required for products that are not related to the conventional mortgage loan.
What Does PMI Do for Borrowers?
There is little benefit for borrowers. Borrowers do get approved for a loan when they accept to pay PMI. Rather, this insurance benefits lenders. PMI gives lenders additional security from applicants who are, in general, less invested in a property and may walk away and default on a loan without a significant personal investment. PMI protects lenders from foreclosures or defaults as borrowers are deemed as higher risk than those who make larger down payments.
When Do Borrowers Stop Paying PMI Payments?
Homeowners will come to a point at which they no longer have to pay PMI. This occurs when the balance of a loan amounts to only 78 percent. The lender will then cancel payment. Borrowers can have it canceled earlier when providing proof of an equity position that the loan-to-value ratio is at 80 percent. Borrowers must pay for an independent appraisal and cost up to $500 as part of this process. Homes that have appreciated in value and remodeling that may serve to increase market value may work to help those looking to eliminate their PMI sooner. Refinancing is also an option after two years.
PMI Requirements for Non-Conventional Loans
With non-conventional loans, homebuyers do not have to put 20 percent down nor pay private mortgage insurance. Since these loans are typically secured by the government, the mortgage company does not require that the buyers hold additional coverage in case of default. Non-conventional loans include ones offered by the Federal Housing Administration (FHA), US Department of Veteran’s Affairs (VA) and other government entities. These loans are typically offered through first-time homebuyer programs as well.
With these non-conventional loans, homebuyers pay a set down payment that has no PMI restrictions attached. This allows homebuyers to minimize their monthly mortgage payment without risk to the lender. The lack of PMI requirements directly reflects the loan backing provided by the government.
For FHA loans, homebuyers only need to pay a 3.5 percent down payment on a residence. There are no set income limits, but the buyer must meet the other eligibility restrictions to qualify for this type of loan. Closing costs and interest rates are also reduced to make the homebuying process much more affordable and accessible to those who qualify. The elimination of PMI and decrease in other expenses does come at a cost in the form of additional service fees.
Loans from the VA also allow homeowners to avoid paying a high down payment and PMI. Eligibility requirements apply for this loan as well, including proof of residual income. Low down payment VA loans have additional funding fees to consider when weighing the home loan options.
When choosing between home loan options with or without PMI, buyers must determine which one offers the biggest financial benefits in the long run. Otherwise, the additional costs and fees can quickly add up to more than the potential PMI payment.
Ways to Avoid PMI
Prospective homebuyers can save up to make a 20 percent down payment. Some may qualify for a VA loan, make a 10 percent down payment and take out a combination loan, or look into a HomePath mortgage as possible alternatives to taking out a conventional loan. Physician loans and loans through a credit union may also serve as options for those making smaller down payments. Not all mortgage products require PMI payments and it may pay to investigate all relevant home mortgage products available. Take the time to read the fine print and know how long borrowers are locked into making PMI payments.