Have you heard the term Private Mortgage Insurance (PMI) when looking into your mortgage options? You may be wondering what PMI is, or even how you will know if it's necessary to finance your home purchase. These answers can be hard to find among all the real estate jargon you might be hearing lately. Below is the short version of what you need to know.
Private Mortgage Insurance (PMI) is an insurance premium required by some 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 require that PMI is added to the loan.
PMI is usually added into the monthly mortgage payment until you reach 20 percent equity in your home through those payments. However, there may be other options available in your area.
Under the current law, PMI will be canceled automatically when you reach 22 percent equity in your home, provided that you are current on your payments. If you aren't current, the lender may not be required to cancel the mortgage insurance because the loan is considered high-risk. After getting caught up on your payments, the PMI will likely be cancelled. Any money that you have overpaid must be refunded to you within 45 days.
With a conventional loan, it may take as many as 15 years of a 30-year loan to pay your balance down 20 percent while making the minimum monthly payment. However, if your property values rises, you might be able to cancel the PMI sooner: some lenders may be willing to consider the new value of your home to determine the equity in your home. In this process, however, you may be responsible for any fees, like an appraisal, that are incurred to assess the new value of your property. In the end, Private Mortgage Insurance is likely a good option if you can't afford a down payment of 20 percent of the purchase price as it allows you to still purchase the home and is likely cancellable once you reach a certian equity amount, depending on the loan type.
With all of the activity happening the housing market, now may be the best time for you to purchase your new home. A smart next move would be speaking with a qualified home financing professional to learn which programs and down payment options are available in your area, whether you'll need PMI, and how you can target and lock in a great rate.
Get started with our Complete Guide to Home Financing below.