Private mortgage insurance was designed to protect the lender; however, there are also benefits for the home buyer.
Private mortgage insurance (PMI) is an insurance designed primarily to protect the lender in the event that a home loan is defaulted on. In most cases it is mandatory that PMI be part of the mortgage package if the buyer puts less than 20% of the value of the home as a down payment. As a borrower, it is important to understand how PMI insurance can benefit you when you want to secure a home loan.
When Is PMI Insurance Required?
Many lenders will insist on PMI when a low down payment is made on a house. The PMI premium will be built into the monthly payment as part of the mortgage. As a borrower builds equity in the home, they can eventually have the PMI premium removed as part of the monthly payment.
While the insurance is designed to protect the lender, it is also allowing borrowers to buy a home that they would not be able to afford. It is not easy to come up with 20% of a home’s value, but with PMI insurance, it is possible to buy a home with less money down. When you consider the low monthly premium you are subject to for the privilege of owning your home with less money down, the PMI insurance premium makes sense.
Asking for PMI to be Removed
PMI remains on most FHA loans until the mortgage is paid off or refinanced. On conventional mortgages you have the right to ask that PMI insurance be removed once you have at least 20% equity in your home. This could come as the result of timely payments, or if a renovation has changed your home’s value. Once you have reached 22% equity in your home, the lender is required to allow you to remove the PMI insurance.
So many people are fixated on having today’s lowest interest rates when the more important question to ask is “What are the PMI cost?” because an .125% increase to the rate is only about $7 per 100k, while PMI could be $100’s per month!
The Sean Z Mortgage team is dedicated to educating every home buyer to be set up for success. In addition to seeking the best mortgages rates available, we also look for the lowest PMI premiums. Our mortgage clients have the best loan options available in St. Louis. If you are a first time home buyer, it is important to work with an experienced professional that you can trust.
Call us today at (314) 361-9979!