We all know that the application process for a conventional or government-insured mortgage can be long and complicated. There are a large number of factors to consider. In this case we are going to focus on the Private Mortgage Insurance.
Article content
- What is Private Mortgage Insurance
- How is Private Mortgage Insurance applied?
- How long does Private Mortgage Insurance last?
- Ways to avoid PMI
- Practical example of Private Mortgage Insurance
What is Private Mortgage Insurance
The Private Mortgage Insurence (PMI) corresponds to a policy that you must take out in the event that you do not collect 20% of the down payment for a conventional mortgage loan. Since the bank or lender estimates that you can recover 80% of the value of the house during a foreclosure when you stop paying, it requires this requirement to cover the remaining 20%.
Private Mortgage Insurance is not designed to give you some benefit, but to protect who gives you the financing. The explanation about its application is based on the fact that the bank assumes greater risk if you cannot get the money requested in advance. Therefore, you need another type of guarantee in case you do not comply.
Fixed mortgage
- Interest: From 3%
- Deadline: 30 years
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Variable rate mortgage
- Interest: LIBOR + spread
- Deadline: 30 years
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Fixed mortgage
- Interest: 3.13
- Deadline: 30 years
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Variable or adjustable mortgage
- Interest: LIBOR + 2.25%
- Deadline: 30 years
More infoRequest
Fixed rate mortgage
- Interest: Consult
- Deadline: 30 years
More infoRequest
This requirement does not work the same way for government-backed home loans, such as those from the FHA or USDA. Another important piece of information about the PMI is that does not prevent points from being taken away from your score credit when you fall behind in your monthly payments or when you are the subject of foreclosure.
How is Private Mortgage Insurance applied?
The charge for private mortgage insurance varies from one institution to another depending on internal policies. Generally, this premium is included in the monthly installment assigned to repay the credit granted. The only advantage of this procedure is that you do not have to make another transfer or deposit to pay the extra amount they charge you.
It is also possible that the lender or bank gives you the opportunity to cancel the PMI with a one-time payment at the time of signing the contract. That is, you can add the additional amount to the mortgage loan or pay in cash. In other cases, the entity could apply a combination of methods, such as part in advance and part in monthly payments.
How long does Private Mortgage Insurance last?
According to banking logic, most financial institutions usually allow you to stop paying the PMI once you reach 20% of the price of the house acquired. This means that you must have a loan-to-value ratio of 80%, which will depend on the down payment percentage you have advanced and the capital returned in the monthly installments.
On the other hand, it is usually common for some entities to ask you for additional collections so that you do not have to continue paying to the Private Mortgage Insurance. It is not surprising that a bank does not allow you to get rid of the premium if you have a second mortgage or because your payment history shows that you did not pay a fee on time.
Ways to avoid PMI
In this situation, the ideal would be to wait to collect the money of 20% of the down payment or to pay the entire house with cash. Unfortunately not everyone can afford that luxury, so there are other alternatives to make private mortgage insurance less expensive:
- Piggybacking. This practice involves requesting 2 loans, one for the main mortgage and the other, with more interest, for the 20% down payment. In this way, you do not have to pay the PMI and you have the option of deducting the interest on both credits specifying each one during the tax return.
- Pay more with the fee. As long as you have healthy finances and you can get the extra money, this is one possibility. The idea is to pay a little more capital each month so that you can reach the desired amount of 20% and stop paying the insurance sooner.
- Retard housing. You should not rule out the possibility that your home increases in value due to different circumstances. The capital gain from improvements in the area means more equity in your name. However, you will have to pay for the new appraisal and ask your lender to remove the PMI if you have the respective 20% or more.
Practical example of Private Mortgage Insurance
Assuming you want to buy a house for $ 200,000 USD, the PMI calculation (0.55 to 2.55%) it will depend on the bank and the down payment. If you get 10% of the advance payment and the interest of the premium is 1%, we have the following:
- Home Value: $ 200,000
- Down payment amount: $ 20,000
- Total loan: $ 220,000
- PMI 1% monthly premium: $ 183.33
- Annual PMI Premium: $ 2,200
The PMI is an expensive requirement that affects your liquidity to finish paying a conventional mortgage. At Hispanic Business Blog we know it, that’s why we offer you our specialized advice and the best mortgage deals on the market.
