Few aspects of financing a home confuse people more than the concept of PMI, which stands for Private Mortgage Insurance. It is insurance a mortgage company requires the borrower to purchase whenever there is less than a 20% down payment. Since a lower down payment could represent a higher risk of default, the borrower pays for this insurance to protect the mortgage company in case the borrower defaults by not paying the loan back.
PMI is included in your monthly mortgage payment, however there are programs that allow the borrower to pay it up front or finance it instead. The actual amount you pay will vary based on your total loan amount and the percentage of your down payment. The higher your down payment between 0-20%, the lower your PMI rate will be. You can avoid PMI by putting 20% or more down on the loan, paying it upfront at closing, or as we’ve seen in some markets, separating the loan amount into 2 loans (known as piggyback mortgages).
Depending on the type of loan, PMI does not last forever. If you have a conventional loan, you can contact your mortgage company and request they remove the PMI once you reach 20% equity in your home. So when you see you have paid your loan balance down to 80% of the purchase price (or refinance value), contact them. If you feel the value of the home has risen enough to where you may now have 20% equity, then you can ask them to remove it, although you may have to pay for an appraisal to prove it.
It’s a different story if you have an FHA loan. For any FHA loans after April 1st, 2013 with less than 10% down, PMI stays for the lifetime of the loan. So the only way to remove it in that instance is to refinance into a conventional mortgage or sell the home and start a new loan for the new property. FHA loans started before that date will have PMI that automatically falls off when you reach 22% equity or you can ask for it to be removed at 20% equity like with conventional loans.
The good news is that for many people, PMI paid on the loan throughout the year is tax deductible as long as your income is within certain limits (currently 110k for a married couple, 55k for an individual). PMI also helps many people get their foot in the door to homeownership who would otherwise not be able to save such a large sum for a down payment. If you don’t want to pay PMI, you’ll need to have a 20% down payment.
If you’d like to learn more or start the purchase of buying or selling a home, contact me. I have a great lender that can help explain more. You can reach me at 610-310-6408 or at www.MarielSells.com!