That Dreaded Mortgage Insurance, Truths & Myths
Everyone used to believe you needed 20% down payment to purchase a home. However, times have changed, and lenders have discovered most Americans can’t afford the fashionable 20% down payment. Therefore, Private Mortgage Insurance (PMI) was born! For those of you who may be unfamiliar with this term, PMI allows you to purchase with a lower down payment. This insurance policy helps cover the lender’s losses in case you default. I’m here to clear up any confusion about this topic and reveal some of the truths & myths of Private Mortgage Insurance.
There are only PMI on FHA mortgages – Myth!
This is false. There is mortgage insurance on any loan with less than 20% down payment or less than 20% equity in the home on Refinance’s. There is one difference on FHA loans however, Mortgage Insurance Premium (MIP). This is required to be paid “upfront” or at the time of closing. Often the lender will wrap this cost into your 30-year loan, so you virtually don’t feel the cost at all. You may be wondering how much is this upfront fee? It is calculated by finding 1.75% of the loan amount.
Mortgage insurance doesn’t have to be forever! - Truth!
This is true. If you have PMI you aren’t locked in forever. In a conventional loan, your mortgage servicer will cancel your PMI automatically when your mortgage balance reaches 78% of the homes value. Or, if property values are rising where you live, or you have made improvements to the home, you can request an appraisal to be done. The appraisal will prove its new value and show the lender you have 20% equity in the home.
On the other hand, FHA tends to be a bit less flexible - with an FHA loan (and putting the common 3.5% down payment) the only way of getting rid of PMI is by refinancing your loan into a conventional loan.
Are you a homeowner who pays PMI and looking to explore your options on getting rid of it? Consider how much equity you have in your home. Then, consider interest rates. If interest rates are low, it may be worth refinancing for a lower rate. This win-win situation and will leave you with a lower rate, no PMI, and therefore a lower monthly payment on your mortgage!