So, you’re buying your first home and your lender tells you that you have to pay PMI insurance with your new mortgage. Your first question is: what exactly is PMI anyway?
Private Mortgage Insurance, or PMI, is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender if you default on your primary mortgage and/or the home goes into foreclosure.
Does everyone have to pay it?
When you apply for a conventional mortgage, most lenders will require a down payment equal to 20% of the home’s purchase price. If you, the borrower, can’t afford that amount then a lender will most likely look at the loan as a risky investment and require that you take out PMI, as part of obtaining the mortgage.
How PMI works?
Loan to value, or LTV, is a primary tool for underwriters of a mortgage loan. LTV divides the amount of the loan by the value of the home. Most mortgages with an LTV ratio greater than 80% require that you have PMI, because they deem you to be more likely to default on the loan, in comparison to those with an LTV of less than 80%.
PMI is usually paid monthly as part of your total mortgage payment to the lender. The good news is, you aren’t bound to PMI forever, as it can be dropped once you pay down the mortgage principal balance.
What’s the advantage of paying PMI?
PMI does come with one major benefit: the ability to buy a home without needing to save up for a 20% down payment. Instead of waiting to save, paying PMI allows you to stop renting sooner. Owning a home can be an effective long-term investment tool. When home prices in your area rise at a percentage that’s higher than what you’re paying for PMI, then your monthly premiums are helping you get a positive return on your investment on your home purchase.
The cost of PMI?
The average range for PMI premium rates is 0.5% to nearly 2% of the original amount of your loan. Freddie Mac estimates most borrowers will pay $30 to $70 per month in PMI premiums for every $100,000 borrowed.
How much you will pay for PMI depends on two key factors:
- Your loan-to-value (LTV) ratio– How much you put down will impact how much you’ll pay for PMI.
- Your credit score– Your credit history and corresponding credit score play a major role in the cost of PMI. The higher the credit score the less PMI percentage you will pay.
If you believe your credit score is low and will affect your private mortgage insurance, schedule a consultation today with Legacy Credits. While they can’t help you avoid paying PMI, they can repair your credit report and raise your credit score to ensure your PMI percentage rate is low.