Private mortgage insurance (PMI) is required by lenders when a homebuyer makes a down payment on their home of less than 20%. If the borrower is unable to, then lenders will typically look at the loan as a riskier investment and will require the borrower to take out PMI.
It is a type of insurance policy that protects the lender, not you, from losing any money if your home ends up in foreclosure. PMI is also required if you decide to refinance your home with less than 20% equity.
How do I pay for PMI?
There are several different ways to pay for PMI. Some lenders may offer more than one option, while other lenders do not. Before agreeing to a mortgage, ask lenders what choices they offer.
The PMI payment is usually paid monthly as part of the overall mortgage payment to the lender. Once the borrower has paid enough towards the principal amount of the loan (the equivalent of that 20% down payment), he or she can contact their lender and ask that the PMI payment be removed.
Borrower-paid PMI (BPMI) is when you have monthly PMI payments, you are required to continue paying PMI until your loan balance reaches 78% of the original value of your home. If you would like to cancel your PMI, you must obtain approval from your lender in doing so and your home must reach 20% of the purchase price or appraised value. It is also required to have adequate equity as well as a good payment history.
Single-premium PMI means that the premium is paid upfront in a single lump sum. This does not require any monthly payments and can be paid at full at closing or financed into the loan.
Lender-paid PMI (LPMI) is a permanent part of your loan. The cost of the PMI is included into the mortgage interest rate and allows for lower monthly mortgage payments. However, with this type, you will end up paying more interest in the life of the loan.
PMI payments on conventional loans are usually cancellable when the loan balance is 78% of the original appraised value of the property.
Payments for PMI can be avoided entirely if you originally make a down payment of 20% of the purchase price of your home.
There are two types of mortgage insurance to pay on FHA loans
Mortgage insurance is required when borrowers put down less than 20 percent. It insures the mortgage for the lender in case the borrower defaults. When the Loan-to-Value is less than 20%, All FHA loans require the borrower to pay two mortgage insurance premiums.
♠ Upfront premium (UFMIP): 1.75 percent of the loan amount, paid when the borrower gets the loan. The premium can be rolled into the financed loan amount.
Annual premium (MIP): 0.45 percent to 1.05 percent, depending on the loan term (15 years vs. 30 years), the loan amount and the initial loan-to-value ratio, or LTV. This premium amount is divided by 12 and paid monthly.
♠ Monthly Mortgage Insurance Premiums (MIP) are not cancellable. The must be paid for the life of the loan regardless of LTV.
USDA Mortgage Insurance is mandatory on all USDA Loans regardless of your down payment amount. USDA mortgage insurance is made up of two parts; the Funding Fee (or Guarantee Fee) and a monthly Mortgage Insurance Premium (MIP), The Guarantee Fee is added to the amount financed and the Monthly MIP becomes part
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