Your mortgage is one of the most significant and most important financial transactions you will ever make. For many of us, owning a home is an essential part of the American dream. Since mortgages are for a large amount of money, lenders take several measures to ensure their loans are protected. In addition to screening applicants and checking their credit history, mortgages are secured by the property itself. Another instrument that lenders use to protect themselves is private mortgage insurance, or PMI.
What is PMI?
PMI is a type of mortgage insurance. Mortgage insurance sounds like something that protects you, but it’s actually something that protects your lender. If you’re unable to make payments and your lender seizes your home, your home is sold to pay the balance of your mortgage. If it doesn’t sell for enough to cover your mortgage, PMI makes up the difference to the lender. It doesn’t protect you in any way; it only protects the lender. Taking PMI can help you qualify for a mortgage, especially if you’re making a down payment of less than 20 percent.
When do I need PMI?
Lenders will typically require you to secure PMI if you make a down payment of less than 20 percent. If you make a lower down payment, the lender is taking on more of the cost of the house, which increases the lender’s risk.
First time homebuyers are especially likely to need PMI because they may not have the resources to make a 20 percent down payment. After all, saving for 20 percent down payment can be a challenge. If you’re buying a home for $200,000, that means you need to have access to at least $40,000 for a down payment. You also need to have funds on hand to cover closing costs, which are typically 2 to 5 percent of the purchase price of the home.
How much does PMI cost?
Like other types of insurance, PMI has a premium payment that’s due each year. The annual premium for PMI is typically .5 to 1 percent of the original loan amount. The exact amount depends on your credit score and the amount of your down payment. If your mortgage loan is for $200,000, this means that your annual PMI premium will be $1,000 to $2,000 per year, which comes to an additional $80 to $160 per month.
Most PMI is paid monthly, but some lenders require the annual payment in full and others allow you to pay using a combination of the two approaches. For example, you might pay half of it upfront and the other half divided up into monthly payments.
Can I get rid of PMI?
You can get rid of PMI, but it takes time. Typically, lenders will allow you to drop PMI once you have 20 percent equity in your home. Your equity is the difference in the value of your home and the balance of your mortgage. It’s the amount of money that you would have on hand if you sold your home and then paid off the balance of your mortgage.
For example, if your home’s current value is $350,000 and your mortgage balance is $300,000, you have $50,000 of equity in your home. In this scenario, you would need to continue carrying PMI, as you have 14 percent equity in your home ($50,000 is 14.2 percent of $350,000). Your lender may require a home appraisal before you can drop the PMI. Once you have 22 percent equity, your lender is required to automatically drop your PMI.
You can speed up the process of getting rid of your PMI by refinancing with the new lender who doesn’t require it, getting a new appraisal that shows your home has a higher value, or paying extra on your mortgage to reach the equity threshold faster. Even paying a little bit extra each month can make a big difference over the life of your mortgage.
As you talk to lenders, ask them about their PMI requirements. Ask them about what you need to do to cancel your PMI.
Does anyone offer loans without 20% down that don’t require PMI?
Not every lender requires PMI for mortgages with a down payment of less than 20 percent. For example, at Arthur State Bank, we offer a special first-time homebuyer mortgage. Our first-time homebuyer mortgage offers:
- Financing for up to 95 percent of the sales price or valuation.
- A minimum down payment of 5 percent which can be money you’ve saved or a gift.
- A fixed-rate for the first seven years, and then a rate that adjusts periodically.
- Flexible terms to suit your needs.
- No origination fee.
- No PMI requirement, even if your down payment is less than 20 percent.
In addition, our standard ARM (adjustable-rate mortgage) does not require PMI. With an ARM, financing is available up to 90 percent of the sales price or valuation.
If you’re looking for a mortgage, it can be a challenge to find an affordable option that doesn’t require PMI, which drives up your monthly payment without providing you with any real benefits. At Arthur State Bank, we believe in the value homeownership brings, and we want to connect you with products that will help you move forward financially.
Your partner in homeownership
Arthur State Bank has been serving South Carolina since 1933. We offer traditional banking with modern convenience. For example, if you’re considering a mortgage, our website offers a mortgage calculator that you can use to estimate your potential monthly mortgage payments.
We offer a variety of mortgage products for primary and secondary residences and commercial property, including:
- First-time homebuyer loans
- Conventional, fixed-rate mortgages
- Adjustable-rate mortgages, or ARMs
- Construction/permanent mortgages
- Home equity lines of credit
Our mortgages typically have a minimum of $50,000 and a number of different terms. Visiting our website can only tell you so much, though. To learn more about the right product for your individual needs, contact us and make an appointment with a loan officer. We can’t wait to help you secure the home of your dreams. Contact us today!