What Is Mortgage Insurance?

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?

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?

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

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!

Request Mortgage Information

Man doing his banking online

AnnualCreditReport.com is the only source for free credit reports authorized by the federal government. Every 12 months, you can get a free copy of your credit report from each agency.

Your credit report has your credit history for all of your credit accounts as well as any credit inquiries and public record court information such as collections. In addition, the report provides personally identifiable information such as your name, address, and employment.

Be sure to carefully review all three reports to identify any problem areas that you may need to clean up prior to applying for a mortgage. If there is any incorrect information, follow the reporting agency’s rules to correct it or add a notation to the report to explain the situation.

Your FICO Score is a score combines data from several areas include payment history, the amount owed, length of credit history, new accounts. Many lenders use this score as a guide. This score is not provided as part of the free annual credit report.

Learn more about how your credit score impacts your ability to secure a loan.

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Couple looking over finances

Primary considerations for setting your housing budget require an assessment of your income, debt and current savings for the down payment on the home. The following are generally recommended guidelines; however, you should meet with an Arthur State Bank lender to get personalized mortgage information.

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Couple meeting with lender

The pre-qualification/pre-approval letter is included with any offer you make on a house to inform the seller that you have met with a mortgage lender and you are prepared to make an offer. The letter states that based on certain assumptions, the bank is prepared to lend you up to a specified amount of money for a home mortgage.

When choosing a loan officer, we recommend going local to work with someone who understands your community’s real estate market. This blog on first-time home purchases includes questions to ask your lender that may be helpful when preparing for your meeting.

Helpful Resources:

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Realtor shaking hands with a client

When a house is sold, the seller typically pays real estate commission to both the listing agent and the selling agent. It is extremely beneficial for the buyer to use their own real estate agent. Loan officers can often recommend selling agents in the area; ask your officer about realtor referrals when discussing your loan.

A good realtor will know the local market and can help you find an ideal home based on your budget, location and desired features. During your search, understand that you will most likely need to compromise on some items, so it’s important to identify your critical needs versus your wants.

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Couple searching online for a home

Additionally, when you start with the house search and work backwards, homes can often go off the market while you’re completing steps 1-4. While browsing homes immediately can be tempting, we recommend following these steps in order so that, once you find your dream home, you’ll be well-positioned to take action immediately.

When you find the home you want and you think you are ready to put an offer on it, you will want to make sure you have all the information you need to make a solid offer.

  • Evaluate the neighborhood.
  • Drive by the house at different times of the day.
  • Examine how other houses in the neighborhood are maintained.
  • Consider any potential traffic or other disruptive noise.
  • Is there ample parking for you and visitors?
  • Read the details in any Homeowner Association agreements (HOA fees and rules).

Make sure to do a preliminary check of house details:

  • Check the water:
  • Does it have good pressure?
  • How long does it take to get the water hot?
  • Is it well water or city water?
  • Turn light switches on and off.
  • Open and close doors and windows to make sure they work properly.
  • Review previous utility bill expenses.
  • Consider the property tax bill.

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Family meeting with realtor at new house

When writing an offer contract, be sure to pay attention to all of the details.

Offer Price:

Your agent should do a market analysis that pulls data on recently sold comparable houses. The best comparisons will come from the same neighborhood.

If you are asking for the seller to pay some of the closing costs, remember that this cost plus the sales commission determines the net amount you are offering the seller for the house.

Work with your agent on your negotiation strategy. There are many things to consider, such as how badly you want this particular house, whether it is a buyer’s or seller’s market and an assessment of the seller’s motivation to get the property sold.

There isn’t one best strategy.

Be sure to document in writing everything you want included with the house, such as appliances, etc. Your agent should guide you through the contract step-by-step.

Contingencies:

  • Home inspection.
  • Mortgage.
  • Final walk through (24 hours prior to closing).

Proposed closing date. Typically, this is 30-45 days from an accepted offer.

A good-faith deposit is required for the offer. This is typically between 1-10% of the purchase price of the house. The deposit is kept in escrow until closing and the money is applied to the purchase price of the house at closing. If the house does not close due to one of the contingency clauses, the buyer receives their money back. However, if the buyer decides not to close on the property, the seller may get the deposit money.

Attach your pre-approval letter to the offer.

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Two people in professional meeting

The clock starts ticking for everything documented in the contract, including mortgage application, inspections and closing date.

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Woman advising other woman on mortgage application

You will need to decide which mortgage to select prior to the application.

Plan for the following potential fees:

  • Application fee (many banks and mortgage companies charge an application fee; however, there is not an application fee at Arthur State Bank).
  • Credit check.
  • Appraisal (may be paid at closing).
  • Loan origination fee (paid at closing).

Once you have approval for your loan, make sure you don’t change anything that will impact the status of your mortgage. Banks do a final check on credit and jobs just prior to closing, so now is not the time to change jobs or make another purchase on credit such as a car or furniture.

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Home inspector going over findings with home owner

Depending on the size of the house, an inspection can cost on average between $300 to $1000.

Many real estate contracts specify how problems uncovered in the inspection will be resolved, up to a certain dollar amount. Should necessary repairs exceed that amount, the buyer has the option to cancel the contract without penalty and receive their deposit money back. Another option is for the buyer and seller to renegotiate who will pay for additional repairs.

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Woman happily holding keys to her new home
  • Homeowner’s insurance is required by the lender prior to closing on the loan.
  • Turn on utilities in your name, effective the closing date.
  • Change your address with the U.S. Postal Service.
  • Make moving arrangements.

Three days prior to closing:

  • You should receive your final Closing Disclosure from the closing agency. The final Closing Disclosure shows a column for the seller and a column for the buyer. All closing charges and credits for both the seller and the buyer are documented in the closing statement.
  • Review the closing statement for accuracy prior to coming to closing.
  • The final amount in the buyer’s column shows you the amount of money you need to pay at closing.

The closing office will provide specific payment instructions. Closing funds have become recent targets for cybercriminals. If you are asked to use a wire transfer, call the office and ask to speak to someone you have been working with to double-check the instructions.

Closing day:

In South Carolina, the closing will usually take place at the attorney’s office. Everyone signing for the mortgage must be present to sign the closing paperwork. Make sure you bring the following:

  • Cashier’s check or proof of payment for wire transfer.
  • Driver’s license.
  • Checkbook, just in case there are any additional items that were not on the closing statement.

Be sure to understand this information:

  • How and when you will pay:
  • Your mortgage.
  • Your property taxes.
  • Your homeowner’s insurance.
  • Any HOA dues.
  • Who to call with any questions.

The best practice is to go through the homebuyer’s roadmap in this sequence. However, if you jumped ahead early in your journey, just circle back to address the steps you missed.

Arthur State Bank’s loan officers are closely tapped into local real estate markets and experts at helping clients get what they need on terms that work for them. We also offer mortgage specials for first-time homebuyers.

To start planning your journey to your dream home, try out our mortgage calculator. If you’re ready to talk to a loan officer, contact Arthur State Bank to request personalized mortgage information today. Don’t forget to ask about our first-time homebuyer offer.

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