What is PMI?
PMI is an abbreviation for Private Mortgage Insurance. This is special insurance that lenders force higher risk borrowers to pay to protect the interests of a bank in case of default. PMI is only applicable in very specific instances, most often when you are borrowing more than eight percent of your home’s fair market value.
Try to avoid PMI at all costs. Don’t be afraid of taking out a second mortgage to buy your home; don’t be afraid to borrow your down payment. PMI is just money out the door that is not going towards your equity or anything that benefits you. You can get PMI removed from your mortgage once you reach a goal of twenty percent in equity. If you have PMI already, work hard to get it removed.
The Purpose for Private Mortgage Insurance
Why do homeowners get saddled with private mortgage insurance anyway? This is insurance for the lender that is now necessary because so many people defaulted on their mortgage loans.
In reality, PMI saves everyone money because without the security offered by this insurance, lenders would be far less likely to lend so much money at such low interest rates. After all, no lender likes high risk borrowers and folks who don’t have twenty percent to put down seem risky.
Plus, PMI is not forever. Once you have your twenty percent in your home you can refinance and PMI will go away, but your low interest rate won’t!
Removing Your PMI
So you have PMI because you didn’t have a twenty percent down payment, and now you are ready to remove it. Where do you begin?
- Watch home values in your area. If your home has substantially increased in value, consider getting an appraisal done of your home to back up your assertion of the increased value. With that data, you can ask your lender to remove PMI.
- Watch the numbers – if you know you now have at least twenty percent invested in your home because of extra payments towards your principle, call your lender. If they see the numbers as well, they will appraise the home again and you’ll most likely be out from under PMI.
- Persistence is the key to removing PMI. If your lender is stubborn about it, consider refinancing. You may even get a better interest rate.
Avoid Private Mortgage Insurance – Piggyback Two Loans
If you can avoid PMI by piggybacking mortgage loans, you absolutely should. If you take out your first mortgage for eighty percent of the value of your home and you don’t have a down payment of twenty percent to cover the remainder, you can actually take out another loan. Say you have ten percent to deposit, you’ll borrow eighty percent from one lender, ten percent from another and put your own ten percent down.
Don’t be afraid of having two mortgages. PMI is a waste of money. Wouldn’t you rather have a second mortgage that, as you pay back, goes directly to your home equity?
Using a PMI Mortgage Calculator Online
If you are buying a home and you think you’ll end up with PMI, use a PMI calculator to better understand the effects of this on your bottom line.
- You must know the purchase price of the property.
- You must know your down payment.
- Finally, you’ll need to choose a loan term of 10, 15, 20 or 30 years.
After plugging in the pertinent data, the PMI mortgage calculator will detail results for each loan type, purchase price, and down payment options that you have entered.
What Determines a Private Mortgage Insurance Rate
PMI rates are calculated using two main factors, the loan type and the amount of the down payment. The loan type relates to how much PMI you need to pay in a given term. In other words the PMI rates will be quite different for a 10 year loan and a 30 year loan. Your down payment gives the lender a specific figure in relation to the loan to value ratio of your home. They will subtract the mortgage from the fair market value of the home and that helps them determine the rate they should charge.
3 Ways to Avoid PMI
What are some simple methods to avoid PMI?
- Buy A Home You Can Afford – If you buy a home you can afford, you are more likely to be able to come up with a down payment that is closer to twenty percent and you are more likely to build equity quickly and get rid of PMI down the line. Don’t get seduced by keeping up with the Joneses – they are probably up to their eyeballs in debt.
- Borrow Your Down Payment – If you can borrow the twenty percent to put down, then you should do it. Tap family or other resources. The interest rate on the loan will probably be far lower than the PMI you’ll be stuck with for years.
- Take Two Loans – A great way to avoid PMI is to take out two mortgage loans when you buy a home. Your first mortgage could be for eighty percent and the second mortgage could be for twenty percent. The great part about this solution is that you avoid PMI and you can pay down but keep your equity line open. This gives you low interest flexibility for future home improvements!
- Put more money towards your principle every month. Make an extra mortgage payment when you can, add money towards your principle in your mortgage payment, pour your extra money into the equity of your home. The more you do this, the faster you will be able to get rid of the expense of PMI.
- Make some home improvements. If you don’t want to just sink cash into you mortgage loan, sink cash into home improvements. If you make substantial improvements to kitchens and bathrooms or if you add to the square footage, the value of your home will rise and therefore so will your home equity.
How to Terminate PMI Quicker
PMI is based on how much equity you have built up in your home. The sooner you hit the twenty percent sweet spot, the sooner you can get rid of your private mortgage insurance.
What are the best and fastest ways to build equity?
Finding a PMI Mortgage Calculator Online
If you want to play the numbers game with PMI, use a PMI calculator to get the right figure. You usually have to get private mortgage insurance when you are borrowing more than 80% of the value of your home. If you want to calculate your PMI into your monthly payments, start with a good PMI calculator.
You can look online at the search engines for alternate options or you can start with large, well know financial resource sites. You could even try your own local bank’s website.
A PMI calculator will help you get a real idea of how much PMI will add to your monthly payment. Look into one so you can budget appropriately.
Getting a Lower Private Mortgage Insurance Rate
Private mortgage insurance is a reality that is hard to escape, especially for first time home buyers. If you do have to take on PMI, make sure you get the best rate possible. Lenders should be able to provide you with different private mortgage insurance rates from which to choose. Make sure you shop for PMI like you shopped for your mortgage.
You can learn a lot about a lender’s PMI options during the mortgage application process. This should be on your list of questions to ask a lender along with questions about interest rate, loan terms and closing costs.
Don’t be afraid to ask about lowering the first private mortgage insurance rate quote you get. Most people don’t and if they did they would be saving a lot of money every month.
