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What Homebuyers Should Know About Private Mortgage Insurance

Feb 17, 2021 | Mortgage

EPM helps all kinds of consumers get the perfect loan for their new home. If you’re getting a conventional mortgage loan with a down payment of less than 20%, you’re going to be required to get PMI or Private Mortgage Insurance. This is insurance for your lender, and covers them in case buyers stop making payments on their mortgage loan.

There are a lot of questions buyers have about this additional cost — Especially for first-time homebuyers. We want our consumers to navigate their home buying process with clarity and confidence, so we are here to address some of the questions people will inevitably have about this additional cost.

Why would I want to pay PMI over saving for a downpayment?

Extra costs can feel frustrating when making a big investment. But the benefit of PMI is that it gives consumers who wouldn’t qualify for a conventional loan without a 20% downpayment the opportunity to get into a great home and begin building equity in it.

 If you’re stuck renting, you could lose plenty of money waiting to save that 20% down while you could have spent that time building equity in your home.

If you’re relocating and need to get into a home, or you have found the home of your dreams and know it won’t be on the market long enough for you to save that downpayment, you could qualify for an FHA loan or a conventional loan with a smaller down payment and PMI.

How much is PMI going to cost me?

This is dependent on the buyer’s credit score. The higher your score, the lower the insurance premiums.

This cost will recur on your monthly payments until your home equity reaches 20% of the cost of your mortgage loan.

With a conventional loan, private mortgage insurance may be canceled after you have gained sufficient equity (usually 20%). It’s canceled automatically after your equity reaches 78% of the purchase price.

Can I pay PMI off up front or get it dropped from my payments faster?

Refinancing  – If you’re in a rising market, it might make sense to reappraise and refinance your home after a couple of years. If the home has appreciated more that 20% of your loan value, you can drop that PMI.

Reappraisal- Did you make some major upgrades to that fixer upper? You could pay for a reappraisal of your home (roughly $300-500), and if you have raised the value  in a significant way, that PMI cost could drop off much sooner.

Accelerated mortgage payments – Maybe you’re in a financial situation where you can expect to significantly increase the amount you pay on your mortgage each month in the near future — Think job promotions, inheritances, paying off other major debts, etc…

Is there a way to avoid this cost without a 20% downpayment?

Get creative. Some people look at home purchasing as a financial investment more than a personal one. Consider purchasing a home that is a duplex, or has an additional living space for renters. That could help cover extra costs while you build your equity.

Homebuying is STILL a personal decision even if the investment is all business. You know what makes the most sense for you and your family. The loan team at EPM can help guide you make an informed decision based on what makes sense for your individual situation. If you’re curious about how we can help you get the right mortgage loan for you, contact a lender today!