While PMI is different than mortgage protection insurance, it is important to understand how PMI works. Private mortgage insurance protects the lender’s investment if the borrower defaults on the mortgage and cannot pay the remaining balance. The assumption of most lenders is that there will be a 20% loss if the lender has to sell the property after foreclosure, but if the borrower pays 20% down, the down payment offsets this loss. If the borrower can’t pay 20% down, most lenders require PMI to protect themselves against these losses.
Can PMI Help Borrowers Get in a Home Faster?
Yes, if the borrower agrees to pay for private mortgage insurance, the lender is more likely to approve the mortgage and close the transaction faster. The insurance policy covers the extra loss margin the lender incurs if the customer defaults on the mortgage, and if a default happens, the insurer pays the lender to cover these losses. If the borrower doesn’t have the cash for a larger down payment, choosing a mortgage option that include insurance is the best way to get on the fast track and get into a home sooner. By purchasing the PMI, the buyer spends more time accumulating equity instead of saving for that down payment.
How Much Is Private Mortgage Insurance?
Essentially, private mortgage insurance is applied at a rate between 0.5 to 1.5% of the total loan amount for each year. To break down the calculation, if a buyer gets a $250,000 mortgage, the insurance premium could range between $1,250 and $3,750 each year. This is $100 to $315 each month until the PMI is no longer required. Some mortgage contracts require the buyer to maintain the coverage until there is at least 20% equity built up in the home.
The private mortgage insurance premiums are calculated according to the total loan value, the length of the mortgage contract, and the type of mortgage the buyer receives from their lender. When starting the insurance, the homeowner must pay an upfront fee that is calculated using the same factors. Just like the interest rate calculations for a mortgage, the lender will use the borrower’s credit scores to determine the premium costs.
Why You Should Buy a Home
Real estate is a terrific investment for anyone, and lenders prefer borrowers who can pay 20% down or get the PMI coverage. According to statistics from the Federal Housing Finance Agency, home values have increased significantly within the last two years. The studies show an increase of seven percent. which could help homeowners earn upward of $13,000 in equity and home value each year.
These details show that if a person purchased even an average or starter home within the last four years, the values could have increased as much as $40,000. Renters will never get these increases and waste money every year giving the property owner a profit while these tenants miss out on higher home values and larger equity returns.
Why PMI Offers a Return on the Investment
Studies show that buyers try to avoid paying for PMI by paying the higher down payment, and some refuse to buy a home just so the individuals won’t have to get the insurance coverage. According to studies, buyers who get PMI get a higher return on their real estate investment.
For example, if the buyer gets a mortgage for $233,000 and the person pays five percent down on the home, the owner could increase the home value up to $276,000 in five years just by purchasing and maintaining the insurance coverage.
PMI Could Be a Wealth Building Tool
While homeownership doesn’t present immediate riches, the investments can give the buyer a significant increase in their return based on how much equity the person builds up in the property, current home values, and the condition of the market. Inflation can increase the value of the properties and present an increase just because of rising inflation rates. For homeowners who bought a home in the early 1990s, the effects of inflation have been beneficial, and many homeowners received an increase in value of up to 65%.
What Does It Cost to Avoid PMI?
The only way to avoid PMI is to pay at least 20% down on the property which offers the 20% equity the lenders require to cancel the insurance coverage and avoid the insurance requirement altogether.
For many individuals, 20% down payments require many years of saving just to get the down payment, and some individuals won’t be able to pay the mortgage payments. Many individuals who pay the higher down payment won’t have the money to cover moving expenses or the cost of getting utilities turned on at the property.
PMI Direct to Buyer Benefits
When reviewing the insurance coverage, buyers find that the coverage doesn’t just cover losses for the lender, but the insurance can help the buyer if the person loses their job in the future and is unable to pay their monthly mortgage payments. Some policies may also provide help if the borrower dies and their heirs are unable to pay off the mortgage. The policies could help the owner in a serious financial crisis.
For example, the insurance offers $1,500 a year if the borrower loses their job within the first six months of the mortgage contract, and the funds cover the mortgage payments until the person can get a new job and get back on their feet.
Can the Person Cancel the PMI coverage?
With a conventional loan, the borrower is not required to purchase PMI at all. With other mortgages, the person may be required to build up 20% equity into the home before canceling the coverage, and some lenders may require the borrower to pay extra money later if the insurance is canceled. The only way for the borrower to know for sure is to contact their lender and discuss the terms of their mortgage contract.
Private mortgage insurance is invaluable to many home buyers and mortgage lenders. By reviewing the requirements of the mortgage and all the benefits of the insurance, buyers determine if the insurance is right for them.