You have already researched, observed the real estate market and now is the time to bet on your perfect home. As you go through the final stages of the mortgage approval process, you (and most other homebuyers) will likely find a new term: private mortgage insurance or PMI. Let’s take a look at PMI, how it works, how much it costs and how to avoid it.
What is private mortgage insurance (PMI)?
Private mortgage insurance (PMI) is insurance coverage that homeowners must have if they pay less than 20% of the cost of the home. Basically, PMI offers mortgage lenders a backup when a home is foreclosed because the homeowner has not been able to make their monthly mortgage payments.
Most banks don’t lose money, so they did the math and found that if they were foreclosed, they could recover about 80% of the value of a house if the buyer fell behind and the bank had to confiscate the house. To protect themselves, banks ask buyers to pay an insurance policy, the PMI, to compensate for the remaining 20%.
How does PMI work?
The PMI is a monthly insurance payment that you make when you deposit less than 20% at your home. It is not an optional form of mortgage insurance, like some other mortgage insurance plans that you may have seen. Here’s how it works:
Once the PMI is required, your mortgage lender will do it through their own insurers.
At the start of the mortgage process, you will be told how many PMI payments you will need to make and for how long, and will pay them monthly in addition to your mortgage principal, interest, and other fees.
You will stop paying the PMI the day your lender calculates that the principal amount of your mortgage will reach 78% of the original appraised value of your home. After that, the PMI stops and your monthly mortgage payment goes down.
The PMI does not in any way cover your ability to pay your mortgage. It protects the bank because they give you more than 80% of the sale price! Once you have to pay the PMI, you will no longer be able to pay these insurance premiums to the bank, whether or not you comply with them and go into foreclosure.
How to get rid of PMI
1. Pay extra for your mortgage each month
You could overpay your mortgage each month and get to the point where you owe 80% or less. However, this could be quite complicated since you will have to find extra money each month.
Take our example above and pretend you could pay an extra $25,000 in a few years. Why not wait to buy the house and save about a year? Then you could buy the dream home for $250,000, make a 20% deposit and completely avoid the PMI!
2. Get a new home appraisal
Keep an eye on the value of your home If you end up having more value than last year (for example, because more people are moving to the area), it means more justice on your behalf. Ask your lender for a new appraisal if you think that the value of your home has increased so much that your capital increases by more than 20%. As long as you owe less than 80% of the new assessment, you can write to your mortgage lender and request that the PMI be terminated.2 However, it is up to you to pay for the new assessment and follow the appropriate steps if you request the lender to do it. finish early.
If you let your house be evaluated after a few years and pay a little more for your mortgage payments each month, you can reach this magic 80/20 threshold much faster and that means big savings!