What is PMI? Tips
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How To Avoid PMI (Private Mortgage Insurance)
Since PMI (private mortgage insurance) is often required by lenders if your mortgage loan amount equals more than 80% of the fair market value (FMV) of your new home at closing, the obvious answer is to borrow only 80% or less. That is the simplest answer to give you but often the most difficult solution to use when your checking and savings accounts aren't stuffed with cash. Luckily, there are a couple of other solutions that might work for you.
One option is commonly called an “80-10-10” program, which is available from some lenders. Remember, although your mortgage lender collects your hated PMI premium, they receive only protection, not income. Therefore, numerous lenders have no problem presenting solutions that eliminate the need for PMI. If you have enough cash for a ten per cent (10%) down payment, you can borrow a first mortgage of 80% of your new home's FMV, eliminating the need for PMI. The remaining ten per cent (10%) needed to complete the purchase will come from a purchase money second mortgage, given you by your mortgage lender or another lending source. Assuming your second mortgage terms are reasonable, you will often save money every month using this approach.
Another solution, that might save you even more, is to borrow from a lender that has one or more “self-insured” first mortgage programs that fit your financing plans. You will pay a slightly higher interest rate than you would otherwise receive. Your lender then uses this extra income to insure themselves for the added risk of granting you a loan that amounts to 85% to 95% loan-to-value (LTV) based on the FMV of your new home, instead of forcing you to get PMI. If the interest rate you receive is near current market rates, you might save more money than if you used the 80-10-10 program described above.
When you consider the options to avoid PMI, also remember that if you are purchasing your new home in a period of rapidly rising prices, you might not be required to keep your PMI for very long. Another factor to consider: While a second mortgage or using a self-insured mortgage lender will result in higher interest rates, your interest paid is tax deductible, so the true cost of the higher rate will be less than you're paying based on your income tax bracket. So, as much as all home buyers dislike paying PMI, avoiding it is not always the right solution. Often it is the best course of action, but you should analyze all the choices available to you.
The Purpose for Private Mortgage Insurance
Most homeowners paying private mortgage insurance believe that it has no purpose other than to annoy them. The truth is that private mortgage insurance became a necessity to lending institutions after years of loans being defaulted on and properties being foreclosed.
Private mortgage insurance is not just insurance for the lender, it is insurance for everyone. Let me explain. You see, we have all grown accustomed to the low interest rates being offered by lenders over the last few years. These rates are great and we all want them to stick around, right? Well, without private mortgage insurance, lending out money on homes would be a much riskier proposition for most banks. Banks do not like higher risk and it is usually met with higher costs. For mortgage loans, this almost always means higher rates.
With private mortgage insurance, lenders can feel more security, overall, in their ability to offer good loans to the public. Next time you are looking at your mortgage payment coupon and are thinking bad things about your private mortgage insurance, look to the other part of the coupon where it has your rate and remember that you probably wouldn't be getting it if it were not for banks being able to institute private mortgage insurance.
Using a PMI Mortgage Calculator Online
If you are purchasing a new home and have a feeling that you may need to take on PMI, you will want to do some research first with a PMI mortgage calculator. You can find free PMI mortgage calculators on the Internet from many different financial websites. These are fairly easy to use and only require you knowing some simple numbers to plug in.
- First, know the purchase price of the home you are interested in. This is the most important number to plug into the calculator.
- Next, plug in the amount of down payment that you will be making. This number combined with the first will tell the PMI mortgage calculator exactly what loan to value ratio it is dealing with.
- Lastly, you will need to select the type of loan you want calculations for.
A PMI mortgage calculator will give you different numbers for a 10, 15, 20, or 30 year mortgage because the term will determine the percentage rate for the insurance. Once you have all of this information plugged in, the PMI mortgage calculator will give you all of the answers you want for each type of loan, purchase price, and down payment that may be a possibility for your purchase.
Removing Your PMI
If you purchased your home and borrowed more than 80% of its value initially, chances are you are paying a stiff amount of PMI each month. Anyone with PMI eventually reaches the point where they are permitted to have it removed from their loan, but the key is in asking. Here is a quick step by step to knowing when you can remove your PMI and getting it taken care of.
First, keep your eye on other homes in your area. Increased home values can help you steam towards the necessary 20% equity that you will need to remove your PMI. Once you see that the hoes in your area have appreciated a good amount, look into getting an appraisal done to determine the present value of your home. If you find that the home is now worth enough to give you the needed equity, you can move on to your lender.
Contact your lender and let them know that you would like to submit a new appraisal for the value of your home. They will typically want to order their own appraisal unless you are working with a mortgage broker. Once they get the appraisal, they will do their own calculations to determine your equity. The key is in hounding them. Lenders typically will not rush these things unless you tell them to. Once they get the numbers, you should have no problem asking them to take the PMI off of your loan and you will be free from it.
Getting a Lower Private Mortgage Insurance Rate
Unfortunately, many home buyers simply have no choice but to take on private mortgage insurance. If you fall in this category, don't take on a higher rate than necessary. Different lenders will have different private mortgage insurance rates and you should shop around for the lowest one as vigorously as you shopped for the lowest mortgage rate.
Start by filling out some online mortgage applications to get various quotes from different brokers and lenders. Examine each of these and pick the best few in terms of rate, closing costs, and terms. Then, approach each of them for more details on how they calculate their private mortgage insurance rate.
Get clear answers to your questions because the smallest changes in these figures will alter your monthly payments. Once you have gotten multiple quotes on a private mortgage insurance rate, you are equipped to make the smartest decision in terms of your mortgage loan. You can find lower private mortgage insurance rates with a little effort and a lot of question asking.
3 Ways to Avoid PMI
- Buy In Your Means – The easiest way to avoid taking on PMI is to buy a house within your means. I know this is a pretty blunt way to say it, but today with interest rates so low, many people are buying homes way outside of their true means. By sticking to homes and loans that fit with a realistic budget, you will be better able to come up with a sufficient down payment or to pay it off quickly.
- Borrow Your Down Payment – If you have resources to tap for down payment assistance, use them. Avoiding PMI is easy if you just have your 20% down payment. Check with family, friends, and financial centers for down payment assistance. You can offer repayment with interest, and a good rate at that, and still never pay nearly what you would have to for PMI.
- Take Two Loans – Remember, PMI is only mandated when any ONE loan exceeds 80% of the loan to value of the property. This does not mean that you can't have two loans for 80% and 20% total. In fact, taking a first and a second is the best way to avoid PMI without needing to go beyond large lending institutions for the funds. Any of these three suggestions can help you avoid taking on PMI. Consult with a professional mortgage broker or lender for more information on how to avoid PMI altogether.
Avoid Private Mortgage Insurance – Piggyback Two Loans
All home buyers should do whatever they can to avoid private mortgage insurance. One of the easiest ways to do so is to take out a first and a second mortgage for the amount that you need instead of a single mortgage at a higher loan to value. This is called ‘piggybacking' loans together and here is a quick run down of how this can help you avoid private mortgage insurance.
Understand that private mortgage insurance is only paid when a person has a single mortgage for more than 80% of the value of their property. Now, let's say that you are buying a home that costs $200,000. You can only afford a down payment of $20,000, or 10%. This means that you will need to borrow a total of $180,000, or 90% of the value of the home to make the purchase. If you choose a single mortgage for the full 90%, you will be liable for private mortgage insurance. However, if you choose to take out a first mortgage for 80% ($160,000) and a simultaneous second for 10% ($20,000) you will have no private mortgage insurance mandated.
Some people are afraid to take on two separate mortgages. This is an irrational fear as compared to paying for private mortgage insurance. PMI is just extra fees and has nothing to do with your principal or your interest. Taking on two mortgages is only about the money you borrow and there are no extra costs such as private mortgage insurance. You tell me which is scarier?
What Determines a Private Mortgage Insurance Rate
When lenders calculate a private mortgage insurance rate, there are two main factors that come into their calculations; loan type and down payment. PMI rates and rate charts will vary from lender to lender, but these two factors are always what they will use to calculate their fees for your loan. The loan type is an important factor in determining the private mortgage insurance rate because you will be making different payment and building different equity based on how many years you have to repay the loan.
The differences are vast between PMI on a 10 year and PMI on a 30 year loan. Your available down payment is also important to the calculation of the private mortgage insurance rate because it will tell the lender exactly what loan to value ratio they will be lending on. The higher the loan to value ratio, the higher the risk for the lender. Therefore, the more you borrow percentage wise, the higher the private mortgage insurance rate will be. Speak with a mortgage specialist about how to calculate your private mortgage insurance rate and use their information to make the smartest choice about how to borrow for your home purchase.
What is PMI?
PMI, or Private Mortgage Insurance, is a form of insurance that lenders make certain borrowers pay for along with their regular mortgage costs. There are very specific situations when lenders require PMI and they are set forth by the general lending rules and regulations. The most common reason for PMI is when you are borrowing a large percentage of your home's worth. Basically, any single mortgage loan that exceeds 80% of the value of the property will be subject to PMI. Many people are borrowing up to 100% of the value of their home as it is the only way they could afford the purchase.
Depending on the specific amount borrowed in relation to the property value, the rate of the PMI will change. PMI is to be avoided as much as possible. Take two mortgages if you have to, but you will see that the costs of PMI when added to your monthly payment can sometimes add 10-25% to your monthly living expense. PMI does not last forever. The best answer to the question of ‘what is PMI' is that it is non-permanent. PMI is waived after either a pre-set number of years after you are in your loan or after you have stabled 20% equity in the property. As soon as you reach this point, get with your lender to have the costs removed.
How to Terminate PMI Quicker
If you are in a situation where you were forced to take on PMI with your home mortgage, there are ways to build your equity faster and terminate your PMI early. Here are a few tips on how you can take action to terminate your PMI as soon as possible. Keep in mind that PMI is based on home value as compared to your loan amount. Therefore, the two best ways to quickly terminate your PMI is through paying down your principal and making home improvements.
Calculators are out there that can show you how much quicker your principal will shrink with only a single extra payment a year. The facts are amazing regarding this and you can sometimes find that building your necessary equity is as easy as making a few extra payments periodically. Home improvements are a different matter. If you want to build equity in your home, you can try to maximize its market value through improvements. Things such as adding square footage, roofing, flooring, and landscaping are projects that can greatly increase your home's value.
Once you have made these improvements, get a new appraisal on your property to see the difference. These can cost a few hundred bucks to get done, but sometimes that is only about one or two months of PMI payments, so it is clearly worth it. If you have PMI, have the goal of terminating it as soon as you can. Look at home improvements and extra principal payments as two of the fastest ways to help.
Cost of PMI (Private Mortgage Insurance)
If you borrow more than 80% of your home's fair market value (FMV), your lender may require private mortgage insurance (PMI). For this coverage, you will pay a monthly premium at a cost that depends on how much over 80% FMV you borrow as this is the amount the PMI company is insuring. The monthly premium varies somewhat by lender but the following schedule should give you a good idea of what it will cost.
- Borrow 95% of FMV: approximately 0.78% (of the beginning mortgage amount) divided by 12
- Borrow 90% of FMV: approximately 0.52% (of the beginning mortgage amount) divided by 12
- Borrow 85% of FMV: approximately 0.32% (of the beginning mortgage amount) divided by 12
- 95% loan-to-value (LTV): $190,000 @ 0.78% = $1,482.00 per year and $123.50 per month.
- 90% loan-to-value (LTV): $180,000 @ 0.52% = $ 936.00 per year and $ 78.00 per month.
- 85% loan-to-value (LTV): $170,000 @ 0.32% = $ 544.00 per year and $ 45.33 per month.
PMI (Private Mortgage Insurance) Explained
Home buyers cringe when a loan officer mentions PMI (Private Mortgage Insurance) and that the buyer may need it. But, the existence of PMI has also helped many people, particularly first time home buyers, purchase real estate. So what exactly is it, you ask? PMI is extra insurance many lenders require if your mortgage loan amount exceeds 80% of the fair market value (FMV) of your new home. Along with the obvious reason, the extra risk created by an equity position of less than 20%, many secondary market buyers of mortgage loans will not purchase loans if the loan-to-value (LTV) is higher than 80% of the appraised value at the time of closing.
Here's how this insurance helps protect your lender from loss: You borrow $250,000 and your home is worth $275,000. You get PMI which “covers” the balance above 80% LTV, ($220,000), leaving $30,000 over 80% LTV that is “exposed.” Should you default on your loan and require the lender to foreclose, the PMI company would pay your lender the portion of the $30,000 they insure less the amount the lender recovers, if any, at the foreclosure sale.
You can cancel PMI coverage once the mortgage balance on your home drops below 80% of the current value of your property. If you want to cancel this coverage before you pay your balance down to 80% or less of your FMV at time of closing the loan, you will need an independent appraisal showing that your home has appreciated to a level that makes your loan balance less than 80% of the FMV. While borrowers dislike paying for PMI, many would be unable to purchase homes without PMI being available. Be aware that you must have an excellent payment history with your mortgage lender to cancel your PMI. If you are 30 or more days behind in your payments, your lender and the PMI company will refuse to cancel your insurance for reasons that should be obvious; the insurance is in place to protect the lender should you default.
Finding a PMI Mortgage Calculator Online
For homebuyers looking to borrow a large portion of their home costs, using a PMI mortgage calculator is an important step to take into account. When borrowing more than 80% of the value of your home, you will need to pay PMI. To get an accurate view of your monthly payments, you should use a PMI mortgage calculator.
Finding these are easy and here are a few places to look on the Internet. First, use search engines and search for “PMI mortgage calculator”. You will instantly get hundreds of thousands of results for websites offering these online calculators. If you do not find any there that seem to give you the right calculations, move on to larger, better known financial resource sites.
Websites such as our sponsor's have lots of resources, including PMI mortgage calculators, to help you make the best home mortgage choices. There are other places on the Web such as directories and financial news sites that have PMI mortgage calculators for public use. In the end, the calculations should all be the same. It is a matter of knowing what each lender will charge in terms of the percentage that will be the final question you need answered.
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