When purchasing a new home, it is important to become educated on what some terms and services really entail. One of the most important things you should know about is; “Just what is mortgage insurance?” Once you discover what it is, chances are you will then want to know; “How can I avoid it?”
Most borrowers purchase their home with less than the desired twenty percent. Most borrowers pay a monthly fee for not having the ideal down payment. Most borrowers do not even know they are paying for this option. Signing a mortgage to purchase a home is a huge step. As a responsible consumer, it is your responsibility to know what you are paying for when you sign the final ownership papers.
What is PMI?
Private Mortgage Insurance (PMI) is a fee some home loan lenders charge homebuyers for not having a down payment. The fees for this insurance vary from lender to lender. These fees can be quite excessive. In theory, once a homeowner has attained equity of 80% the insurance is no longer required. Many mortgage lenders do not drop this policy automatically when you have reached the 80% mark for equity. There are some lenders that require this insurance for at least five years.
How to Avoid PMI
- PMI can be avoided. The number one way is to of course make sure you have the required down payment.
- If you have been paying on your home for a while, talk with your lender and determine if you have reached the magic 80% equity threshold. As long as all other terms have been met for your lender, the PMI will be cancelled.
- Refinancing is an option at 95% equity. When refinancing, you will have the option to pay a onetime Premium Mortgage Insurance payment.
- Home improvements can add up. If you are making your payments on time, every time, and this is the only way you are adding equity to your home, it could take a while to get to the 80% equity needed. There are many home improvement projects that will increase the value of your home and property.
- Keep an eye on area property values. If they are rising, refinancing at a lower rate will also eliminate the PMI payment included in your mortgage payment.
PMI is Not Buyer Protection
Even though it is insurance, it does not cover the borrower. This insurance is designed to cover the lender in case of default. It will not take away any responsibilities of the borrower for the payment of the loan. The insurance is to protect the lenders investment. The most common reason PMI is attached is because of a low down payment or a low credit score. It can often mean the difference of qualifying for a loan or not.
Of course if paying this insurance is your only option, knowing what it is and how to eliminate it will help in future financing options. The most important thing in every mortgage deal is to be sure you can afford the payments. A PMI payment could be 200.00 or more per month of your required mortgage payment.
Many states have different remedies for those paying PMI, or are upside down on their mortgage. It is important that you, the borrower, become informed and understand what is available and how you can benefit.