PMI, which is also called private mortgage insurance, is protect that the lender may ask the buyer to purchase. In the event that the buyer defaults on their home loan and the home enters foreclosure, the lender has a way to recoup their losses.
While the lender may not ask everyone to purchase PMI, there are some situations where the lender may ask the buyer to purchase this insurance policy to qualify for the loan.
Every lender is a little bit different; however, there are some trends throughout the industry. Most lenders ask the buyer to place a down payment of about 20 percent of the total price of the house. If the buyer is not able to put at least 20 percent down on a home, the loan is riskier for the lender. In this case, the lender may ask the buyer to purchase a PMI policy.
The Structure Of A PMI Payment
Typically, the PMI policy is paid in a monthly manner. It is included as a part of the total mortgage payment as the buyer pays the loan back to their lender. The positive news is that the buyer typically does not have to pay PMI for the life of the loan. Once the equity in the home reaches about 22 percent, the lender typically terminates PMI.
In some situations, the buyer may be able to contact the lender and ask for PMI termination at an earlier date. Some people can negotiate this percentage or time period in advance of taking out the loan.
The Cost Of Private Mortgage Insurance
In general, the cost of a PMI policy is dependent on the value of the mortgage loan. It typically runs somewhere between 0.5 percent and 1 percent of the total value of the mortgage loan. Therefore, this can raise the monthly mortgage payment by a significant amount.
For example, if someone receives a $300,000 loan from the bank with a PMI policy of 1 percent, the buyer will have to pay an extra $3,000 per year as part of their mortgage payment. This is an extra $250 per month on their total payment. For some people, this additional cost might make their dream house unaffordable.
Therefore, whenever possible, buyers should try to work with their trusted professional mortgage lender and look at options to avoid purchasing PMI. Every lender is a little bit different when it comes to private mortgage insurance.
If you are in the market for a new home or interested in listing your current property, let’s make it happen. Call me 630-430-1091 or email [email protected].
For many homeowners, their mortgage payment contains more than just principal and interest. A little something called PMI could be representing a significant portion of that payment, and it’s important for home buyers to understand this cost. I do my best to explain both in this article for my South Side Chicago homebuyers.
What Is PMI?
PMI stands for private mortgage insurance, or sometimes just mortgage insurance. However, it isn’t intended to mitigate risk for the homeowner, but rather the bank.
Statistics show that when a home buyer puts less than 20% down on a home, he/she is much more likely to default. So, requiring these buyers to carry PMI helps the bank hedge their losses in the event of a default.
It’s important to note that the home buyer doesn’t shop for PMI; this is all taken care of by the lender. However, the cost of PMI should be calculated out well before closing to help the home buyer be aware of his/her final mortgage payment.
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Who Needs PMI?
Who will need to carry PMI depends on factors like the credit rating of the buyer and the exact mortgage being sought out. However, it’s safe to say that most home buyers with less than a 20% down payment will be required to carry PMI.
Does PMI Ever Go Away?
Eventually, PMI can be removed from a mortgage once enough of the principle has been paid down or enough years have passed.
It’s important for home buyers to fully understand the terms of their PMI requirement. Sometimes, it will be automatically removed once 20% of the house has been paid off, while other times, refinancing may be required.
Should Those Who Cannot Put 20% Down, Not Buy A House To Avoid PMI?
Unfortunately, this is not an easy question to answer. Yes, PMI is an extra cost that needs to be calculated into the cost of the home – but putting off a home purchase isn’t necessarily the right course of action.
For many families, it’s financially challenging to save up 20% of the cost of a home. After all, in 2010, the median home price of new homes sold in America was $221,800. A 20% down payment on such a home would be $44,360.
However, many find that it’s still cheaper, or just financially wiser, to buy a home with PMI than to continue renting. Want more information on how you can qualify to become a homeowner? Let’s set up a time to chat, email me your schedule [email protected].
Are you a current Chicago home buyer in the market looking for a new home? If you are considering a mortgage, you may be curious about mortgage insurance, commonly referred to as PMI or MI. Let’s explore the topic of mortgage insurance, including how it works to reduce risk and how it benefits you as the mortgage borrower.
Mortgage Insurance = Risk Reduction
You might not know this, but the toughest part of the home buying process for a Chicago home buyer is coming up with the required down payment. For example, if you were to buy a $200,000 home, you may want to invest $40,000 or $60,000 or more in the down payment. The remainder would be borrowed in your mortgage, which you would then pay off each month.
Most mortgage lenders require a minimum of 20 percent as a down payment. In the example above, this means having $40,000 cash on hand before you buy the home. If you can’t come up with this much, your lender may require mortgage insurance be purchased to protect them in case you default on the loan.
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Mortgage Insurance Can Help You Qualify
Since mortgage insurance reduces the lender’s exposure to risk, it can help you in a number of ways during the qualification process. First, you can put less in your down payment than you had initially intended, which can increase your buying power and the size of home you can afford. Mortgages backed with a private insurance policy tend to be approved a bit faster than those that aren’t. Also, if you decide that you don’t need it later, many mortgage insurance policies can be canceled, which saves you a bit of money.
Look For Supplemental Benefits
Finally, don’t forget to ask your mortgage lender about any supplemental benefits offered with your mortgage insurance policy. Some policies protect you in the event that you lose your job or provide a partial claim advance if you can’t pay your mortgage. Note that not all policies have these benefits, so be sure to ask.
While it is true that mortgage insurance provides benefits to lenders, it also offers significant benefits to you as the borrower. To learn more about mortgage insurance or to get pre-approved for a mortgage so you can buy a home, give us a call today. Our friendly team of real estate professionals is happy to help.
Homeowners insurance and title insurance may not be the only kinds of insurance you need when you buy a Chicago home. Many buyers also have to purchase mortgage insurance, which lenders require for mortgages with a down payment of less than 20 percent. Take the time to understand what you’re buying and how long it will affect you.
Mortgage Insurance Protects the Lender
Most types of insurance will pay you if you make a claim. Mortgage insurance, though, is solely for the lender. If you were to stop making payments and the lender foreclosed on your Chicago home, the mortgage insurance would pay the lender the difference between the profit from selling your home and the amount you still owed on your mortgage.
Types of Mortgage Insurance
When you have a mortgage with a traditional lender, you get private mortgage insurance, often abbreviated PMI. This insurance is provided by a third party, although your lender will typically dictate who provides the insurance. When you get an FHA mortgage, the federal government provides the mortgage insurance and you pay mortgage insurance premiums, often abbreviated MIP.
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Mortgage Insurance Amount
You can generally expect to pay 0.5 percent to 1 percent of your loan balance each year for private mortgage insurance. FHA mortgage insurance premiums are set by the federal government, and as of 2017, are 1.75 percent of the loan balance up front, plus 0.45 percent to 1.05 percent of the loan balance each year, depending on the type of loan.
How to Stop Paying Mortgage Insurance
FHA loans have mortgage insurance until the loan is paid off, either through regular payments or by refinancing. Traditional loans automatically cancel mortgage insurance when you have reached the point on your amortization schedule where the loan balance drops below 78 percent of the purchase price. You also may be able to apply to cancel mortgage insurance as soon as your loan balance is less than 80 percent of your home’s current appraised value.
How Can You Get Around Paying Mortgage Insurance?
When purchasing a Chicago home, the only way to avoid having to buy mortgage insurance is to get a mortgage for less than 80 percent of the home’s purchase price. However, the cost of mortgage insurance may be something you’re willing to pay for the opportunity to buy now without a down payment of 20 percent.
Carrying debt is a common problem that people have. Some of the most common types of debt include student loans, credit cards, and motor vehicles. When you are interested in buying a new home, you often think about whether or not your debt is going to hurt your chances of qualifying for a new mortgage.
Fortunately, you may still get a new home with that debt. There are several factors that may determine whether or not you qualify.
Your Debt to Income Ratio
The debt to income ratio is a major factor that the mortgage lender is going to consider when deciding whether or not you will qualify for a new mortgage. In general, the magic number is 43 percent. If your debt exceeds 43 percent of your total income, the lender will have a hard time giving you that new mortgage.
For example, if you make $5,000 per month, you will want to have less than $2,150 in monthly debt payments. To make yourself a more attractive candidate for a mortgage, try paying off some of your existing debt.
Taking A Look At The Credit Score
The lender is also going to consider your credit score. The higher your credit score is, the more likely the lender will reward you with a loan. In order to keep your credit score high, make sure you manage your debt well.
Making your debt payments on time will keep your credit score high. Missing debt payments will lower your score. Manage your existing debt well and you will have a better chance of qualifying for a mortgage.
Making Sure You Can Handle A Mortgage
Finally, the lender is also going to take a look at whether you can take on the responsibilities of owning a home. The monthly mortgage payment isn’t the only expense you will be taking on. Some of the other issues you will have to handle include property taxes, maintenance costs, and homeowners’ insurance.
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The bank or credit union will want to ensure you can handle these costs. To make these expenses easier to bear, it might be a good idea to pay off some of that existing debt.
Investing In A New Mortgage
Looking for a new home is exciting. You can purchase a house with existing debt as long as it is minimized and managed well. Think about these factors before investing in a mortgage.
If you are in the market for a new home or interested in listing your current property, I would love to help you. Please email or call me so we can discuss your real estate needs, [email protected] or 630-430-1091.