PMI: Private Mortgage Insurance
PMI, or Private Mortgage Insurance, is special insurance that lenders mandate of higher risk borrowers to protect the interests of a bank in case of default. PMI is only required in particular circumstances, such as when you are borrowing more than eighty percent of your home’s fair market value.
If at all possible, try to avoid PMI. Be creative by taking out a second mortgage to buy your home or borrowing your down payment. PMI does not contribute towards your equity or benefit you in any way. If you currently have PMI, strive to get it removed. PMI can be removed from your mortgage once you reach twenty percent in equity.
Why Private Mortgage Insurance?
This is insurance for the lender that is important because too many people defaulted on their mortgage loans.
Without the security provided by this insurance, lenders would be far less likely to lend money at low interest rates. No lender feels comfortable with high risk borrowers, such as borrowers who don’t have twenty percent for their down payment.
When you have your twenty percent in your home you can refinance without PMI, without giving up your low interest rate!
If you are paying PMI because you didn’t have a twenty percent down payment, what can you do to remove it?
- Monitor home values in your area. Get an appraisal done of your home if your home has increased in value. With that data, you can ask your lender to remove PMI.
- Watch your loan values. If you know you have at least twenty percent equity in your home because of extra payments towards your principal, call your lender. They can appraise the home again and you’ll most likely eliminate your PMI.
- Be persistent about removing PMI. If your lender is willing to consider it, consider refinancing. You may be able to get a better interest rate.
How to Avoid Private Mortgage Insurance – Piggyback Two Loans
Avoid PMI by piggybacking mortgage loans. If you apply for the first mortgage for eighty percent of the value of your home, you can then take out another loan to cover the remainder. If you have ten percent to put down, you could borrow eighty percent from one lender, and ten percent from another lender.
Don’t be intimidated to have two mortgages. PMI is a waste of money. Wouldn’t you rather have a second mortgage that adds to your home equity as you pay it back?
PMI Mortgage Calculator – An Online Tool
Use an online PMI calculator if you are buying a home and you think you’ll end up with PMI. This will help you better understand the effects of PMI on your bottom line.
- You’ll need the purchase price of the property.
- You’ll need to know how much you are planning to use as your down payment.
- Finally, you’ll need to choose a loan term of 10, 15, 20 or 30 years.
Input the pertinent data and the PMI mortgage calculator will give you results for each loan type, purchase price, and down payment options that you have chosen.
What Determines the Rate of Private Mortgage Insurance?
There are two main factors used in calculating PMI -- the loan type and the amount of the down payment. The loan type affects how much PMI you need to pay in a given term. For example, the PMI rates will be quite different for a 10 year loan versus a 30 year loan. The down payment determines the loan to value ratio of your home. They will subtract the mortgage from the fair market value of the home and to determine the rate they should charge.
What Are 3 Simple Ways to Avoid PMI?
- Buy A Home You Can Afford – You are more likely have a down payment of twenty percent. You are also more likely to build equity quickly and be able to get rid of PMI sooner if you buy a house that you can afford. Don’t try to “keep up with the Joneses” – they are probably up to their eyeballs in debt.
- Borrow Your Down Payment – If you can borrow the twenty percent for the down payment, you can avoid PMI. Get creative and ask family or other resources. The interest rate on the loan will undoubtedly be far lower than the PMI.
- Use Two Loans – A great way to avoid PMI is to take out two mortgage loans when you buy a home. Your first mortgage is for eighty percent and the second mortgage is for twenty percent. With this great solution, you avoid PMI and you can pay down but keep your equity line open. This gives you low interest flexibility for future home improvements!
How to Eliminate PMI Quickly
The sooner you hit the twenty percent equity point, the sooner you can get rid of your private mortgage insurance.
What are the best and fastest ways to build equity?
- Put extra money towards your principal every month. Make an extra mortgage payment when you can, add extra money towards your principal in your mortgage payment. Pour your extra money into the equity of your home. The more you do this, the faster you will be able to get rid of the expense of PMI.
- Make some home improvements. If you don’t want to just add extra cash into your mortgage payment, use the cash to make home improvements. If you make substantial improvements to kitchens and bathrooms, or if you increase the square footage of your home, the value will rise and so will your home equity.
Finding a Lower Private Mortgage Insurance Rate
Private mortgage insurance is a reality that is difficult to escape, especially for first time home buyers. If you do have to pay PMI, make sure you get the best rate possible. Lenders should be able to provide you with different private mortgage insurance rates from which to choose. Shop for PMI like you shopped for your mortgage!
Ask questions about the lender’s PMI options during the mortgage application process. This should be one of your standard questions to ask a lender along with questions about interest rate, loan terms and closing costs.
Don’t be afraid to ask about lowering the first private mortgage insurance rate quote you get. Many people don’t ask, but if they did they would be saving a lot of money every month.