Whether you’re looking to refinance your current mortgage or you’re looking for a new loan, you need to know about private mortgage insurance (PMI) and how it affects you.
PMI is a privately secured insurance that is required on conventional loans with less than 20% equity in the property. This insurance protects the lender against any loss if the borrower defaults on the loan. A mortgage is just a large investment to the lender so they want to protect their interest in your home.
How PMI Works
When you start your loan, a private insurance agent will set up a policy that calculates 2% or more of your loan value that will be charged monthly as a part of your loan. So the higher the overall loan, the more you pay. This amount is based upon your current credit score and the overall down payment.
If you have an FHA secured loan, PMI is required throughout the life of your loan. FHA mortgages are loans that are given to lenders with less than perfect credit scores and lower down payment amounts. So it only makes sense that a PMI would be required.
Reducing and Eliminating PMI
There are multiple ways to reduce and eliminate your PMI. Considering the type of loan is your first start. If you’re a veteran and you qualify for a VA loan, you’ll never be charged private mortgage insurance. You worked hard to protect your country, now your country wants to protect you.
FHA loans require PMI through the life of your loan. Because FHA loans are available to borrowers who have lower credit scores, and lower down payments, an FHA loan is their only option. But it’s these same factors that make them a higher risk to the lender. Requiring PMI is the lenders way of protecting their interest.
If you have an FHA loan that requires mortgage insurance, the best way to eliminate your insurance is to build your credit, build on equity, and refinance with a new conventional loan.
If you have a 20% down payment when you apply for your loan, PMI will not be required on your loan.
Although conventional mortgages may require PMI in the beginning, as you grow the equity in your home you grow closer to eliminating your mortgage insurance. It takes time to build up 20% equity in your home. In the beginning of your loan, more of your payment goes to interest than principle. By paying a bit more every month, you build up equity faster, shortening the length of time required before you can remove the required insurance.
When you hit the point of 20% equity and you qualify, there are two options to look at. If you are sure you have the best loan you can get, you can just request that your lender drop the PMI and lower your monthly payment. But if interest rates are lower, and loans are prime, you might want to consider this time to refinance your house. Contact a broker at Integrity First Lending and see if you qualify for a no closing cost mortgage.