What is private mortgage insurance? Why do you need it? Freddie Mac defines private mortgage insurance (PMI) as an insurance policy that protects the lender if you are unable to pay your mortgage. It is not an insurance that pays your mortgage off if you can’t – it is an insurance policy that protects the lender if you do default on the mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.
The cost of PMI will vary based on your credit score and mortgage amount. The higher your credit score, the lower the cost. The higher your down payment, the lower the cost. For example, if you put 3% down on a $250,000 purchase and your credit score is 720, your mortgage insurance payment will be $113/month. If your score was 760, your payment on the same loan would be $74/month. Another example would be putting 10% down on a $200,000 purchase, your payment would be $42/month if your score was 760. There are variables that can affect your mortgage insurance rate. If you are using a first time homebuyer program, the rate is usually lower. If you are using state or county programs such as MN Housing, the rate is the lowest you can get – again depending on your credit score.
Mortgage insurance will go away on conventional loans once you have 20% equity in the home. Typically you need to keep mortgage insurance for at least two years. At that point, you can ask to have it removed. If you have paid your principal down to 80% of the original purchase price, they will drop the PMI as long as your payments are on time. If you are using an appraisal to show the equity, you may need to keep the PMI for as long as 5 years. Always check with your lender or your realtor before you spend money on an appraisal to get rid of PMI.
The benefit to paying mortgage insurance is that you can buy a home with as little as 3% down. You can start getting equity in your own home rather than paying your landlord’s mortgage. It can take several years to save 20% towards your home purchase and as home prices go up, it makes it harder to qualify.
Are you ready to buy? Maybe you don’t have 20% to put down, but you can do 3% or even 5% down – it’s a great time to look at buying a home and by using mortgage insurance, you can buy now! Talk to your lender and see what you can qualify for in a home!
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc., An Equal Housing Lender, NMLS#150953 – Email – Website
