Have you heard the term Private Mortgage Insurance (PMI) when looking into financing your new home? Maybe you have PMI now on your current home loan. In either case this blog post is for you!
You may be wondering what PMI is and how to know when you need to purchase it or are allowed to get rid of it. These answers can be hard to find among all the real estate jargon you might be hearing lately. Below is my short version of what you need to know.
What is Private Mortgage Insurance?
Private Mortgage Insurance is an insurance premium required by almost all lenders to offset the risk of a borrower defaulting on their home loan. When you put down less than 20 percent of the real estate’s purchase price, the lender will generally require that PMI is added to the loan in one form or another.
The most common practice is to add it into the monthly mortgage payment as a monthly payment until the equity position in the real estate reaches 20 percent. However, there are a few other options available here in Springfield Missouri through our PrimeLending office.
Your Options
The truth is you may have options that you are not aware of. You don’t need to put 20% down on your new home loan to avoid monthly PMI and very few people know this. You can choose to pay the PMI as a single pay premium upfront as part of closing costs or finance it into the new mortgage loan.
In most cases the breakeven point is about 34-42 months compared to paying the PMI monthly. Therefore, if you plan on keeping the new home you are buying in Missouri for more than 3-4 years you will be money ahead to buy out the PMI with one of those two options.
What if Your Real Estate Increases in Value?
With a conventional loan, it may take as many as 15 years of a 30-year loan to pay your balance down 20 percent making the minimum monthly payment. The factors that accelerate equity are home appreciation and the extra payments you pay towards your principle balance. So, if property values in your Missouri neighborhood rise, or you pay your mortgage on a bi-monthly schedule you might be able to cancel the PMI sooner than what was predicted on your amortization schedule given to you at closing.
Some lenders may be willing to consider the new value of your home with a current appraisal to determine the equity in your home. Don’t order this yourself! As of May 1st, 2009 Home Valuation Code of Conduct (HVCC) and the new appraisal rules it is best to let your mortgage servicer order the appraisal for you so that it is in compliance.
You may, however, be responsible for any fees, like an appraisal, that are incurred to assess the new value of your property.
Now May Be A Very Good Time To Take Action
With all of the activity happening in the housing market, now may be the best time for you to purchase your new home without PMI.
A smart next move would be speaking with a qualified home financing professional to learn which programs and down payment options are available in the Ozark area.
