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What is Private Mortgage Insurance? What Home Buyers Need to Know

Posted by Chip Glennon on Monday, January 14th, 2019 at 10:08am.

What Home Buyers Need to Know About PMIThere’s a lot that goes into buying a new home, and buyers need to know about everything that may stand in their way before the closing date arrives. One thing that home buyers should be familiar with is called private mortgage insurance, or just PMI. But what exactly is PMI, and why is it important? Here is what home buyers need to know about private mortgage insurance cold possibly affect their mortgage loans. 

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

What is PMI?

When a home buyer pays their down payment, depending on their mortgage loan of choice, they can pay anywhere from 3-20%. However, in exchange for a down payment lower than 20%, the new homeowner will also have to pay PMI every month with their normal mortgage payment. The cost of PMI will vary depending on the home, but it typically costs .5-1% of the home’s total cost per year, split equally across all the mortgage payments. 

As one might expect from the name, PMI is used as insurance for the institution providing the loan in case the homeowner becomes unable to afford their mortgage. While PMI is paid as part of the mortgage so homeowners don’t have to juggle multiple payments each month, PMI payments don’t count toward a home’s equity. 

How Long Does PMI Last?

PMI expenses added to each month’s mortgage payment may sound expensive, but fortunately it isn’t forever. In most circumstances, homeowners only need to pay for PMI until they build equity equal to 20% of the home’s value, which is equal to the 20% down payment they would have needed to pay in order to get out of paying for PMI. After the equity has been built up, homeowners no longer have to pay the extra fee. However, it’s possible that the PMI won’t be automatically removed from the mortgage payments once 20% equity has been accumulated, so homeowners paying for PMI should keep an eye on their equity and call their lender to cancel it as soon as they can, otherwise they may be waiting until equity reaches 22%.

Are There Ways Around Paying PMI?

Homeowners who can’t afford to pay a 20% down payment are usually forced to pay PMI, but there are actually a few ways to get around paying it altogether. However, homeowners shouldn’t get their sights set on using one of these methods because they aren’t accessible by many home buyers. Keeping that in mind, here are some ways to avoid PMI:

  • Using a VA loan. Several of the different types of VA loans don’t require the home buyer to have a down payment, and that means no PMI, either.
  • Using a USDA loan. Like a VA loan, these don’t require the home buyer to have a down payment, so buyers don’t have to worry about PMI.
  • Apply for a loan through the Navy Federal Credit Union. The credit union offers zero-down and 100% financing to qualifying members. 

While these can be good ways to get around paying PMI, they aren’t available to everyone. VA loans are only for members of the US Armed Forces, and Navy Federal Credit Union loans are for Navy members. USDA loans are the most accessible, but the home being purchased must be in an approved suburban or rural location.

If a Leawood home buyer isn’t expecting it, having to pay for private mortgage insurance can come as a big shock. While it may be inconvenient, it’s a small price to pay in exchange for being allowed to purchase a home with a down payment as low as 3%. 

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

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