When many people apply for a mortgage or look into buying a home, the term PMI is likely to come up. Many people ask their mortgage broker or lender, “What is a PMI and why do I need one?”
What is a PMI?
PMI stands for private mortgage insurance in the real estate industry. It’s an additional percentage added onto your mortgage payment if you made a down payment that is less than 20 percent. Private mortgage insurance is an additional fee that provides the bank with an insurance policy in case an individual happens to default on their home loan. This insurance became a requirement for individuals putting less than 20 percent down after the housing market burst in 2008. The PMI encourages lenders to be more willing and consistent to provide loans to individuals who may have a higher risk due to a lower amount of currently available funds or other factors that may be borderline, such as debt to income ratio.
Who has to have a PMI?
Many individuals have a PMI on their home loans. Over 700,000 families were able to buy a home that they may not have qualified for in 2015 because of the addition of the PMI, according to U.S. Mortgage Insurers. To be honest, not many people simply have $80k sitting around in bank account to put 20 percent down on a $400,000 home. In fact, most people struggle to get the five percent needed for a conventional loan. A PMI makes the dream of owning your own home a reality and does so in an affordable way by adding a small amount ranging typically from 0.3 percent to around 1.5 percent to your monthly mortgage payments.
How can you get rid of a PMI?
A PMI is not a permanent payment. You do not have to pay a PMI for the entirety of your home loan, no matter the finally loan price. The one thing that can get the PMI taken off of your home loan is to reach the loan-to-value ratio, where you have paid a total of 20 percent on your home loan. Additionally, you can have your home reappraised if it has gained value, which also will count to your loan-to-value and make it easier to remove the PMI if the housing market is doing well or if you have made significant updates since the previous appraisal.
A PMI makes it possible for many families to acquire home loans for their own property. Additionally, a PMI helps protect a lender from a potential foreclosure and the loss of funds. Understanding a PMI before you sign for a mortgage is very important. To learn more, work with Berkshire Hathaway HomeServices and Frost Mortgage in Santa Fe today!