What is PMI?
So you've recently started mapping your goals to homeownership and along the way you've stumbled across the term, private mortgage insurance (PMI) or mortgage insurance premiums (MIP). Let's discuss what it is, when it comes into play, and if you can avoid it.
Mortgage Insurance (PMI or MIP) is an added insurance policy by the lender for people who put down less than 20% on a home. These two insurance policies are very similar. Private Mortgage Insurance only applies to conventional loans, and Mortgage Insurance Premiums only apply to FHA loans. This mortgage insurance protects the lender in the case of a mortgagor being unable to make their mortgage payment. These insurance policies are not the same thing as a homeowners insurance policy. PMI/MIP is completely separate, but would also be paid monthly with your mortgage. That's the unfortunate thing about mortgage insurance, it's an added cost, however, it allows you the opportunity to buy now, versus letting more time pass for you to save 20%
Cool, so when do these mortgage insurance policies come into play? A person can expect to pay mortgage insurance any time they go to purchase a home and have 19.99% or less for their downpayment. The best way to find out how much a mortgage insurance policy would cost you is by talking to a mortgage lender.
Okay, so how do you avoid paying this extra insurance fee? I'm sure you've guessed it by now. The best way to avoid paying this extra fee is to bring 20% or more to the closing table for your downpayment. The best thing about these insurance policies is they don't last forever. You actually have a few options in getting rid of the insurance policy.
Option 1 is to pay your mortgage down to where it automatically falls off. The only catch is PMI usually terminates automatically once the loan has reached 78% of the home's original value.
Option 2 is to pay your mortgage down to the 80% mark and then request a PMI cancellation.
Option 3 is to refinance to get rid of PMI.
And of course, to find out the most accurate answer to your personal situation, you'll have to discuss the topic with a mortgage lender. Click here to get started.