If you’re in the market to buy a new home or thinking about doing a refinance, you may have come across the term private mortgage insurance. What is private mortgage insurance, exactly?
The team at Capital Credit Union is your go-to expert when it comes to all things pertaining to financial education and literacy. We’ll walk you through the ins and outs of private mortgage insurance so you have a better understanding of what it is, how it works, and how it can help you secure a mortgage that fits your needs.
Private Mortgage Insurance Explained
So, what is private mortgage insurance? Private mortgage insurance, or PMI, is a form of insurance that protects lenders when borrowers pay less than 20 percent down on a home. Typically, lenders want you to put 20 percent down on a traditional home loan so you’re only financing 80 percent of the home purchase price. But not every homeowner can afford to make a 20 percent down payment. So some lenders give you the option of financing up to 100 percent of the home purchase price in exchange for paying PMI.
Think of it as a tradeoff of sorts. A lender that allows you to finance more than 80 percent of the home purchase price is taking on extra risk. Home values fluctuate over time so if the market value of your home drops, you could wind up owing more on your home than it’s actually worth. If you stop making your mortgage payments, then your lender could be out the difference.
As an incentive to take on this additional risk, a lender will often charge PMI. In exchange, you’re able to close on a home without having to wait until you have a 20 percent down payment saved. PMI makes it possible for families without a large amount of cash savings to realize their dream of owning their own home.
How Much Does Private Mortgage Insurance Cost?
PMI rates vary based on the lender, market conditions, and other factors, such as your creditworthiness. But you can expect to be charged a percentage of your total loan amount. So the higher the amount you finance, the more you’re likely to pay each month in PMI. Your PMI could be as little as less than 1 percent of your loan amount, or it could be higher.
If you’re planning to put down less than 20 percent toward your home loan purchase, ask your lender how much PMI you’re likely to be charged. You can factor this into the overall cost of the loan when shopping around for the most competitive financing terms.
How Does Private Mortgage Insurance Work?
PMI is typically rolled into your monthly mortgage payment. Rather than making a separate payment for PMI, you’ll make a single payment toward your outstanding loan balance and any PMI that is due.
You may be wondering how long you’ll have to pay PMI. Usually, PMI will automatically drop off once you’ve paid down a certain percentage of your loan—typically, when you’ve built at least 22 percent equity in your home.
Keep in mind, though, that you may be eligible to have PMI removed once you’ve paid 20 percent of the home purchase price. If you have at least 20 percent equity in your home, you can contact your lender and request to have your PMI removed. As you shop around for a home loan, ask your lender at what point you can expect to stop paying PMI.
In some cases, you may be able to pay PMI up front as a single payment. This will keep your monthly mortgage payments lower. But keep in mind that if you sell your home or refinance your mortgage, your lender may not refund you any portion of the PMI premiums you paid up front.
There’s also an option to have your lender pay the PMI. But if you opt for lender-paid PMI, be prepared to pay a higher interest rate. And unlike borrower-paid PMI, which drops off at a certain point, that higher interest rate will remain the same over the life of the loan. While you can refinance for a lower interest rate, you will likely need to pay closing costs and lender fees again at that time.
Discuss each PMI option with your preferred lender. Then weigh the pros and cons of each before deciding which way to go.
What to Expect With Capital Credit Union
Want to close on a home loan but concerned about making a 20 percent down payment? It is possible to own a home without having thousands of dollars saved. Why delay your dream of home ownership? Capital Credit Union makes it easy for most anyone to start building home equity today.
Whether you’re a first-time home buyer or a seasoned homeowner, we’ll help you find the home loan solution that works best for your financing needs. We offer many home loan options, all with competitive interest rates.
We’ll also ensure your home loan closing goes as smoothly as possible. You can close on an adjustable-rate mortgage with as little as 5 percent down. Plus, no PMI is required if you put down more than 10 percent. For our fixed-rate mortgages, PMI is required when your down payment is less than 20 percent and you opt for a loan term longer than 15 years.
Another benefit of closing with Capital CU is that we work with several organizations that provide down payment assistance. We also offer federal VA loans, which require no down payment for qualified veterans. Another bonus? No PMI is required! So if you’re a qualified veteran, you can own a home with no money down and potentially save thousands by avoiding PMI altogether.
If you’ve ever dreamt of owning your own home, allow the lending team at Capital CU to help you make your dream come true. Contact us to learn more about our lending options. We’re confident you’ll be in your new home before you know it.