Private mortgage insurance (PMI) is something that you might have to purchase, when you receive a traditional home loan. If you are purchasing a house, lenders need this insurance in conjunction with a traditional loan, as a safeguard in case your property is foreclosed. PMI covers the lender for part of the balance if the property is foreclosed and sold for below the outstanding mortgage amount.
The Basics of Private Mortgage Insurance
Normally you will require mortgage insurance if the downpayment you make on your home is under twenty percent of its’ selling price. Also, mortgage insurance is necessary with US Department of Agriculture (USDA) and Federal Housing Administration (FHA) loans. If you need mortgage insurance, it will be included on the monthly bill your lender sends you.
It will also be included in your closing costs. Bear in mind that all types of mortgage insurance are designed to protect the lender — should you fail to keep up with your mortgage repayments — and not you. Therefore, if you default on your mortgage, you could lose your property through foreclosure and damage your credit score.
Why You May Need Mortgage Insurance
Although it makes your loan more expensive, mortgage insurance allows you to buy a house that you would not be able to buy otherwise, if you lack the funds to make a downpayment of twenty percent on a property. This makes it easier for first-time buyers to buy a home without having to figure out how to make a large downpayment.
Mortgage Insurance and Loan Types
Rates for PMI depend on your credit score and downpayment amount. Borrowers who make low downpayments have several loan options open to them. The type of loan you receive will determine how you pay for your mortgage insurance:
With FHA loans, you pay the premiums on your mortgage insurance to the FHA. If you get one of these loans, you will need FHA mortgage insurance. This type of insurance includes a monthly fee added to your monthly repayment, and an upfront fee paid along with your closing costs. You are permitted to incorporate the cost into your mortgage, if paying the upfront fee is problematic for you. This will increase the cost of your loan overall though.
USDA loans work in a similar way to FHA loans, although they are usually more affordable. The related insurance is paid for monthly and at closing. Moreover, as with a loan from the FHA, you can incorporate the upfront part of the insurance payment into your mortgage — rather than paying it immediately. However, doing this increases your overall fees and the amount of your loan.
With Department of Veterans’ Affairs (VA) loans, mortgage insurance is replaced by a VA guarantee. These loans, which are designed for military veterans, active duty soldiers and their relatives, feature no monthly insurance premiums. Nonetheless, you have to pay a “funding fee” in advance, and the amount you pay will vary depending on:
-The amount of your downpayment -The military work you do -Whether you are refinancing or purchasing a house -The nature of your disability -Whether you have received such a loan in the past
As with the USDA and FHA loans, the upfront fee can be incorporated into your mortgage — rather than paying for it in advance, but this increases your costs overall and the amount of your loan.
How to get rid of Mortgage Insurance
If you had to get PMI when you purchased your property, you should monitor your repayments. After you have repaid twenty percent of your property’s value to loan ratio, you can ask your lender to get rid of PMI from your monthly repayments. Remember that PMI will remain, unless you ask for it to be removed.
However, if you bought your house after 2013 with an FHA loan, removal is not possible at all. You will be required to keep the PMI on your loan for the lifetime of your loan. You can refinance your loan to remove the PMI, however, this puts you at risk for a higher interest rate and additional costs including closing costs.
It is always advised to seek the knowledge and expertise of a mortgage broker on the options you have available for your loan and getting rid of PMI. My team and I at LendPlus would love to help. Contact us today to discuss your options!