Do you feel so overwhelmed with real estate terminology that you wonder how you’ll ever buy a house? Don’t worry; even though you’re busy being a hero (here’s looking at you teachers, doctors, nurses, medics, firefighters, law enforcement, and military professionals) it’s fairly easy to read up and understand one of the confusing terms- Private Mortgage Insurance (PMI). Let’s take a look at private mortgage insurance, and what it means when you’re buying a home.
What is Private Mortgage Insurance?
Lenders take a risk every time that they loan people money for a home mortgage. Borrowers with little equity in their home are more likely to default on their home loan than people who enjoy more ownership; lenders protect themselves when they provide low down payment home loans by requiring the borrower to pay for private mortgage insurance.
Private mortgage insurance is a monthly fee that lenders charge borrowers who put down less than 20% of the value of the home. The costs typically amount to between .3 and 1.5% of the original loan amount each year.
It’s important to remember that the amount of PMI that a lender will charge varies depending on such factors like your credit score and the amount of down payment you put up for a property.
Your credit score gives a lender a quick way to determine how healthy your credit position is at the moment in time. A credit score is calculated by one of the three credit reporting agencies, Experian, Equifax, and TransUnion, by analyzing your credit data. Along with your payment history, the analysis focuses on information regarding your:
- Types of credit and length of credit history
- Percentage of available credit
Credit scores range from 300-850. Lenders celebrate borrowers who present credit scores above 750 with lower interest rates and PMI premiums. Use these tips to improve your credit score to pay less PMI:
- Pay down credit card balance and overall debt
- Check credit report for errors
Did you know that many credit reports are rife with errors that erroneously reduce credit scores? Protect yourself against mistakes in your credit report by asking a credit reporting agency for a copy of your report and scrutinizing it. Tell the credit reporting agency of any errors immediately.
You’ll have to pay private mortgage insurance for home loans with less than a 20% down payment. However, the cost of the PMI goes down as the amount of money that you can commit upfront increases. In other words, it benefits you to put as much money down as possible.
There are many home loans available for little to no down payment. Most of these low down payment loans require the borrower to pay for private mortgage insurance. There is one major exception – a VA loan.
VA loans are available for no down payment to eligible borrowers. Importantly, because the United States Government guarantees the loans, borrowers who choose to put down less than 20% of the purchase price on a house do not need to pay for private mortgage insurance.
With so many lenders and loan options available, make sure that you work with an expert loan specialist who understands your needs in financing a home purchase. Homes for Heroes loan specialists work with home buyers throughout the United States to find the best possible home loan opportunities. As an added benefit, these loan specialists save you money by offering discounted lending fees when you buy or refinance a home.
SIGN UP to speak with a Homes for Heroes affiliate loan specialist in your community.
Is Private Mortgage Insurance Permanent?
No, in many cases private mortgage insurance is not a permanent part of your mortgage payment. Therefore, considering that PMI is an extra fee on top of your mortgage payment, you’ll want to stop paying for it as soon as possible. You can cancel the PMI when the loan to value ratio, also called the ltv ratio, falls below 80%.
Loan to Value Ratio
Simply put, the loan to value ratio is the amount of your home loan divided by the value of the home. For example, if the value of a house is $200,000 and the down payment is $10,000 the loan to value ratio is 95%. To cancel the PMI requirement, you’ll need to reduce the 95% to under 80%.
There are two primary ways to reduce the loan to value ratio on your home. The first, and obvious, way is to continue making regular mortgage payments. Paying your mortgage reduces the loan amount, and eventually, you’ll no longer need to pay for private mortgage insurance.
The second way to lower the loan to value ratio is to wait for your home to appreciate. Home appreciation decreases the ltv. To use home appreciation as evidence that the loan amount compared to the value of the home has fallen below 80%, you’ll need to pay for a new home appraisal.
Since your ability to eliminate your PMI rests on a sufficient appraisal value, it’s critical that you do everything possible to help your house obtain a positive assessment. Here are some tips that will make your house stand out.
- Mow the lawn and trim trees and hedges
- Clean and declutter the house
- Perform routine maintenance of heating, air conditioning, water heater, electrical, and plumbing systems
- Repair any roof issues
- Fix and replace broken appliances
The above tips will get your house into shape to impress the appraiser. It’s also helpful to put together information on recent sales of comparable properties in your neighborhood. Let the appraiser know of anything that might be about to occur in your area, such as the opening of a new shopping area that might increase the value of your home.
Finally, there are many benefits to homeownership, and you shouldn’t allow the lack of a significant down payment deter you from buying a home. SIGN UP today to chat with a Homes for Heroes real estate specialist about the many ways we can help you to buy a house. We’ll connect you to the Homes for Heroes real estate and lending specialists in your area who can find ideal financing options for your home purchase, and advise you on all things PMI.