If you’re a potential home buyer and have chatted with a loan officer or two, or have been doing some internet research about how mortgages work and what to expect during the home buying process, you’ve likely heard the term “private mortgage insurance” also called PMI. The real estate process is full of terms to learn and understand. In this blog post, we’re going to discuss what private mortgage insurance is, how PMI works, and what types of common loans require PMI. Let’s take a look.
What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance is a common line item on many home loans. Private Mortgage Insurance basically protects your lender in case you default on the loan. Most home loans acquired without a 20 percent down payment will require PMI, and the cost of your PMI will be incorporated into your monthly mortgage payment.
PMI can be viewed as a win-win when you are buying a home without this size of a down payment. The bank or lender will be able to take you on with less funds upfront, and you will not need to save as much in order to buy a great home.
How Private Mortgage Insurance Works
PMI or Private Mortgage Insurance is usually acquired by your lender through an outside insurance group. They will review your loan numbers before giving the lender a breakdown of the insurance total. Your lender will note it separately on your mortgage papers, however, it will often be conveniently included in your monthly loan payments.
You might have two other options to pay your mortgage insurance when you receive your home loan. One option is to pay your yearly PMI all at once. This should only be considered if you plan on staying in this home for the entire year; it might not be refundable if you sell the home and move. The second option allows you to pay a large portion of your private mortgage insurance when you receive your home loan and then continue to pay lower monthly installments to cover the remaining balance throughout the year.
Again, always discuss these options with your lending officer to make the best choice for you.
Once you have 20% equity in your home, PMI can be stopped and the cost removed from your monthly mortgage payment.
What Types of Loans Require Mortgage Insurance?
Many loans will require private mortgage insurance if you do not pay 20% of the home’s price when you purchase it. Most common is the conventional home loan. At the same time, there are a few options where you might not need PMI.
1. VA Loans. The home loan offered by the US Government for Veterans does not require a 20% down payment in order to avoid Private Mortgage Insurance, but does require a funding fee.
2. USDA Loans. This loan for rural homebuyers does not require private mortgage insurance with the home loan, but does require what’s called a monthly guarantee fee.
3. Alternative Loans. Some alternative loan carriers will waive Private Mortgage Insurance but increase the interest rate on the loan.
4. FHA Loans. These types of government loans usually have their own form of mortgage insurance included with your payment.
How to Calculate PMI
Currently, the average range for PMI premium rates is under 2% of your original loan amount per year. There is a handy calculator here on NerdWallet.com to give you an idea of what your private mortgage insurance could be. Or speak with your mortgage lender when you discuss your pre-approval process. They will know more details about your price range and the insurance group they tend to work with.
They can take into account the range of the listing prices of the houses you are looking at buying, the down payment you are considering, the interest rates you qualify for, and the term of the loan you’d like in order to configure your PMI total. They can also review any questions about these numbers with you at the time.
Your Helpful Memphis Area Real Estate Agent
When it’s time to sell your existing home or buy a great new place, turn to a highly-respected and well-informed local real estate agent. You want a real estate agent who will guide you through both your local home selling and buying processes. You want someone that you can trust to give you the best advice and know-how for your home purchase or sale. Check out my other great articles to help you through your home selling and buying experiences here in Memphis. I can also refer you to some great home loan lenders to get you started right away!
And, take a minute to learn more about me and how I can guide you with your house sale, new home purchase, or buying a great parcel of land. With over 15 years of top-notch service for my clients, I want to help you with your home selling or buying process. As a top 1% real estate agent in the Memphis, TN area, showing you the best properties for you and your family is my goal! Contact me at (901) 828-8919 or drop me a quick note at angie@angiekelley.com and we can speak in person about your real estate plans and options. I look forward to speaking with you today!
Angie Kelley, Crye-Leike Realtors
(901) 828-8919 or (901) 756-8900
