You may be curious about the term PMI being bandied about as you have been checking around for a mortgage but you don’t understand what it means or how it impacts you. Don’t worry, let’s take a closer look at what a PMI is and how it can affect your chances of getting a mortgage.
What Exactly is PMI?
PMI simply means private mortgage insurance. It is a type of mortgage insurance that you could be required to have when purchasing a home through a traditional loan. Even though it may appear to counter to its name, the PMI requirement is there for the sake of the lender and not you. The idea behind a PMI is to protect the lender from a loss if a customer defaults on the loan.
FHA loans, which stand for federal house loans, have a comparable requirement; which is called your mortgage insurance premium (MPI). It is different from conventional loans in the fact you can often end your mortgage insurance requirement after a few years, FHA buyers are required to keep up their MPI payments for the entirety of the loan.
PMI can be assessed in multiple ways, usually according to the lender and their policy. Usually, there is a premium included as part of a monthly mortgage payment, which means that even though you’re paying slightly more than you would without it, you don’t have to worry about writing another check each month.
In other cases, PMI is collected as a lump-sum during settlement, which means you would have the choice of paying in cash-on-hand or rolling the payment over into your loan amount. In another case, you may find a combination of both upfront and monthly payments.
How Long Do You Have to Pay PMI Charges?
A number of mortgage lenders allow you to drop private mortgage insurance when you have built up at least 20% equity in your house and have a loan-to-value ratio of 80%. How fast you get there depends on things like your monthly mortgage payment amount, and your down payment.
Sometimes mortgage lenders will implement a few additional conditions that you must adhere to in order to get rid of your PMI requirement. An example of this is that you may be required to present a history of making punctual mortgage payments or the lender may not allow you to drop the requirement if you also have a second mortgage.
Is there a Way to Avoid PMI?
An obvious and simple way to avoid paying PMI is to get the requirement waived entirely. You most likely can get the requirement waived if you’re prepared to make a substantial down payment that covers 20% of the loan and gets you an 80% loan-to-value ratio from the start.
To Sum Up
In the end, you have to do what works best for you. While it is feasible to avoid PMI for some, others will have to accept the PMI requirement. It is simply a necessary evil and essential to becoming a homeowner. It’s up to you; if you can balance your financial circumstances with the realities of your local market to make an informed decision that will work for you.
Trust Megan Dowdy Realty
If you are a renter in Central Florida and are considering purchasing your first home, call Megan Dowdy Realty. Or you can also complete our simple contact us form. We have the experience and knowledge of today’s housing market to guide you through the home buying process. You can count on us to explain each step of buying your first home. We can also advise which home lenders are your best bet for being approved for a mortgage. Don’t wait for another second to build wealth through a new home, call today!