Some insurances, like the kind that are offered after a big purchase or a car rental, may seem unnecessary. Depending on factors like the strength of your current policies, you may get away by opting out.
In the real estate world, and the many transactions and steps embedded in the home-buying process, things are a little different. I’m talking about PRIVATE MORTGAGE INSURANCE (PMI). Many homebuyers will be required to carry PMI.
Before you cringe at paying for ANOTHER policy for the next 30 years, I have a few things I want to share with you regarding PMI. I get A TON of questions about this in the Phoenix market, and sometimes there’s misinformation out there. That is why I decided to provide this information that I believe will open your eyes and make you feel good about your own financial future!
Private mortgage insurance is an important topic. If you’re thinking about buying a home, please read this through and see what PMI is all about and WHY!
WHO NEEDS IT?
A GREAT question. Lenders know that if a borrower has a large stake in their investment, like 20-30 percent down payment, then it is unlikely that they will default on the loan.
But those who don’t have a large down payment, may need to get PMI.
Similarly, there’s a requirement for buyers who do not submit a down payment of at least 20 percent of the purchase price. This circumstance occurs pretty frequently. It’s really common. The rules that govern mortgage insurances are set by government-controlled companies like Fannie Mae.
Many loans are made with down payments between 5 and 20 percent.
WHAT IS THE COST?
Typically, buyers can expect to pay between .5 or 1 percent of the entire loan amount annually for insurance costs.
For instance, someone with a $200,000 loan paying on the higher range of insurance premium can expect to pay about $2,000 a year. The good news is that your insurance can be tax deductible.
WHO DOESN’T NEED IT?
Buyers hoping to sidestep this cost have options. The first and most obvious option is to secure a Conventional Loan with at least a 20 percent down payment.*
Another option is to obtain a second mortgage. This is known as “piggyback” and allows the buyer to use the funds toward the down payment. It is not uncommon for these sorts of loans to carry a higher mortgage rate.
HOW YOU GET RID OF IT
I saved the best for last. No, you will likely not have to pay for mortgage insurance for the life of the loan.
Mortgage insurance can be removed once there is more than 20 percent equity built up in the home. Or, it’ll be automatically terminated when the principal balance reaches 78 percent of the original value.
As a mortgage educator, I hope you found this information useful. My goal is ALWAYS to provide you with the resources and knowledge YOU NEED TO MAKE AN INFORMED DECISION. You deserve it! Please take a look around on my website, where you’ll find other important content about your financial well-being.
*Example 30 Year Fixed: Loan amount $300,000, 20% down, monthly payment without taxes and insurance $1,475.00, APR 4.389%
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