What is Private Mortgage Insurance?
When a homebuyer is looking to make a purchase, all kinds of new terminology can come into play. There is closing costs, discount points, and PMI just to name a few. PMI, also known as Private Mortgage Insurance, or PMI Insurance… no matter what you call it, it always accomplishes the same thing. Unlike traditional insurance, which protects an owner’s property from harm or loss, Private Mortgage Insurance does not cover the homeowner. Its job is to cover the lender in case of default.
Typically, Private Mortgage Insurance is applied in Conventional Loans where more than 80% of the loan amount is still unpaid. With FHA Loans, PMI exists throughout the entire loan. The fees of Private Mortgage Insurance vary. There are a couple of factors which play into this.
- Credit Score: Having a higher credit score will lower the PMI payment.
- Amount of Loan: A loan amount of 200,000 dollars will have a higher PMI payment than one of 100,000 dollars.
- The amount of Down Payment: With a higher down payment, typically the PMI goes lower. Someone who puts down 10% of the loan amount is likely to have less PMI than someone who puts down 3.5%.
The Chart below shows average PMI rates for FHA mortgages that are typical for purchase loans. The chart shows that immediately after the housing market crash, PMI payments were the highest they’d been in the previous 10 years! However, in 2015 these began to fall significantly, in order to ease the burdens that PMI can cause on new homeowners.
Mortgage insurance is most commonly found on FHA loans, as they require mortgage insurance. However, FHA loans also typically have lower interest rates, to encourage people to consider them.
How do I get rid of Mortgage Insurance?
Mortgage insurance does not have to last forever, in fact, there are a few simple ways to get rid of it. The easiest way for all non-FHA mortgages, to wait until the loan amount falls beneath 80% of home’s original value. This means that if a homebuyer gets a $100,000 home, the loan amount must fall to $80,000 in order for the homebuyer to request that the mortgage insurance be discontinued. If the loan amount falls to 78% of the initial purchase price, the lender must discontinue the PMI.
In an FHA mortgage, however, this is different. With an FHA loan, Mortgage Insurance will continue for the life of the loan. The good news is, that with a refinance, it is possible to get rid of mortgage insurance very quickly. The best way to see if a homeowner is eligible for a refinance is to speak with a licensed loan advisor.