Many first time homebuyers often ask us what is PMI on a mortgage? PMI primarily protects the lender should the borrower stop making payments on a conventional loan. But what many often forget is it also gives homebuyers the ability to purchase a home without saving 20% for a down payment.
PMI means Private Mortgage Insurance.
You can avoid PMI with lower than 20 percent down payments by splitting the loan into an 80 percent first lien and an 10-15 percent second lien.
Your loan officer can help you understand your options between Conventional Conforming and Jumbo loans as well FHA and VA loans. Your LO will also be able to explain how your down payment, PMI, mortgage insurance premium (MIP), or VA funding fee will affect your monthly payment.
PMI monthly costs vary and can range anywhere from .43 to 5.96 percent of the loan amount for fixed rate mortgages depending on how you choose to pay it.
The amount each homebuyer ultimately pays in the end for PMI depends on things like credit score, loan-to-value ratio, mortgage type and down payment amount. To calculate the cost take 0.0085 X the loan amount and divide that by 12 months. This will equal your monthly MIP amount that will be added to your monthly payment.
You can calculate your Private Mortgage Insurance by taking the insurance rate (which is calculated using the lower of all borrower’s middle credit score), down payment, and loan type on conventional loans and multiplying this rate by your total loan amount and then dividing that by 12 months.
Please contact your loan officer if you have any questions.
MIP means Mortgage Insurance Premium and it’s required on all FHA loans. You will be required to pay up-front MIP at closing or roll it into your loan.
FHA loans also require a non-cancelable monthly MIP premium. MIP (Mortgage Insurance Premium) is required on all FHA loans and is typically 1.75% of the loan amount for up-front MIP that can be paid at closing or rolled into the loan amount.
The minimum down payment on an FHA loan is 3.5 percent of the lesser of the sales price or appraised value.
Please use caution if you are using online mortgage calculators. If you use one, be sure it includes principal and interest, monthly taxes, monthly PMI, Homeowners Insurance, and HOA dues if applicable (PITI).
Call your loan officer to verify your total monthly payment.
The cost of your Private Mortgage Insurance or MIP is found in the “Explanation of amount due” section of your mortgage statement and is included in your escrow payment (which goes to your escrow account).
Your escrow account pays your PMI, Homeowner’s/Hazard Insurance, and Property Taxes annually if it is required. Your Homeowners Association dues for living in a HOA will be paid by you and may be billed by your Homeowner’s Association monthly, quarterly, or annually.
HOA Dues are not included or paid from your escrow account.
A straightforward way to stop paying for private mortgage insurance is to attain 20% equity in your homebased on a new appraisal.
After reaching this point you can formally submit a request to your lender to cancel your PMI.
A home appraisal may be necessary to demonstrate your 20% equity. Do not order a home appraisal yourself because the lender will not use it, it’s best to let them order it. These can cost anywhere from $650 to $2,200 based on the square footage of your home and these amounts are subject to change.
If you can’t convince your lender to drop your PMI, another step you could take is to refinance your mortgage with a lender that is not currently servicing your mortgage and they will use the new appraised value based on a new appraisal.
Please note that all requests to cancel PMI must be in writing and approved by your lender. The good news is that once your loan-to-value ratio becomes 78% of the original value on a conventional loan, the PMI is automatically cancelled.
If you choose an FHA loan, your monthly MIP or Mortgage Insurance Premium will not be cancelled for the life of the FHA loan.
You could refinance your FHA loan to a conventional mortgage if the PMI is significantly lower based on your equity or if your home value or equity is 20% or more based on an appraisal.
