Last Updated on August 30, 2022 by Luke Feldbrugge
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, 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?
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.
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 have built up equity. So, lenders protect themselves when they provide home loans by requiring the borrower to pay for private mortgage insurance. The PMI amount that a lender will charge varies depending on your credit score and your down payment.
Impacts of Credit Score
Your credit score gives a lender a quick way to determine how healthy your credit is. 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 reward borrowers with higher score with lower interest rates and PMI premiums.
Down Payment Impact on PMI
You’ll have to pay private mortgage insurance for home loans with less than a 20% down payment. However, the more money you put towards a down payment, the less the PMI will be. For example, if you put 5% down, your PMI will be higher than if you put 8% or 15% down. So, it benefits you to put as much money down as possible.
There are many home loans available for little to no down payment, like FHA or USDA loans. Most of these low down payment loans require the borrower to pay for something similar to private mortgage insurance, called upfront funding fees. So, even if they require less than 20% down payment for the loan, there still is an assurance being paid.
Exceptions with VA Loans
VA Loans are an exception to the 20% down payment rule. VA loans are available for no down payment to eligible borrowers who are current military members or veterans. Because the Government guarantees VA loans, borrowers who put down less than 20% do not need to pay PMI.
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 U.S. to find the best loans for them. Plus, our loan specialists save you money by offering discounted lending fees when you buy or refinance a home.
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Is Private Mortgage Insurance Permanent?
No, in many cases private mortgage insurance is not a permanent part of your mortgage payment. Therefore, considering PMI is an extra fee on top of your mortgage payment, you’ll want to stop paying it as soon as possible. You can cancel the PMI when the loan to value ratio, or LTV ratio, falls below 80%.
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%.
Reduce Loan to Value Ratio
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 because the value of the home is higher than when you bought it. 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.
There are many benefits to homeownership, but 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.