PMI Explained: A Home Buyer's Guide to Private Mortgage Insurance
When you apply for a mortgage, you will find that there are other monthly expenses in addition to your principle and interest on your loan. Properly understanding those expenses and when they apply can ensure that you have enough money in your budget for the home that you want and that you are not paying more than you have to. Private mortgage insurance (PMI) can be costly. Learning whether you are obligated to pay it and what it is you are paying for can make you a more informed purchaser.
What is PMI?
This is a type of insurance that protects the lender. PMI will cover a lender's cost if you stop making mortgage payments.
How do you pay PMI?
There are a few ways that PMI is calculated and added. In most cases, it is paid as a monthly premium and added to the mortgage payment each month for your Culver City home. Your PMI costs will show up on your closing disclosure.
In other cases, you may be charged one up-front premium at the time of closing. While this can sometimes offer some monthly savings on your mortgage payments, you may lose the money you paid if you move or refinance your home. In most cases, PMI paid up front cannot be refunded later.
You may also see PMI offered as a hybrid where you pay some up-front and a premium each month. It is important to shop carefully to see which options offer you the best financial deal.
Can you avoid PMI?
Typically, the most common way to avoid paying PMI from the beginning is to have a down payment of more than 20 percent. If you are able to put down the fifth of the value of your home at the time of purchase, most lenders will not require PMI.
In some cases, you can also avoid PMI if your lender offers loans with smaller down payments that do not require it. However, these loans typically have higher down payments. Do the math on several potential loans to ensure that you do not wind up paying more out of pocket on a loan that doesn't require PMI.
What some people do not realize is that PMI can be removed later on after you've met certain conditions. The first is paying down your mortgage to the point where you have over 20 percent equity in your home. Once the balance of your loan goes lower than that, you can request that your lender cancel PMI. This can sometimes be accomplished by prepaying on your loan; even an extra $50 a month toward the principle can add up quick.
If you are in an area where home values have increased since your purchase, which is common in high-value areas such as Santa Monica, you may be able to cut PMI costs by refinancing. When you refinance your mortgage based on the new value of your home, your new lender many not require that you pay for mortgage insurance.
You may also be able to have a new appraisal done on your home. A lower value may reveal that you have crossed over the 20 percent threshold and are no longer obligated to pay PMI. Talk to your lender about whether they think this tactic will work with your home.
There are a number of factors that can affect what you pay at closing and how much you pay over the life of your loan. Study loan documents carefully to ensure that you are getting the best deal on this important investment.