DO INVESTORS HAVE TO PAY PMI?

Yes you will, that’s because of the mortgage insurance involved!

Private mortgage insurance, commonly shortened to PMI, is a common cost for homeowners who made a down payment smaller than 30 percent of the homes purchase price.

What is PMI?

Private mortgage insurance (PMI) is a type of insurance that conventional mortgage lenders require when home buyers put down less than 30 percent of the home’s purchase price.

PMI is designed to protect the lender in the event that the homeowner defaults on the loan. While it doesn’t protect the homeowner from foreclosure, it does allow prospective homebuyers to become homeowners even if they can’t afford a 20 percent down payment. If  a lender decide you will need to pay PMI, it will coordinate with a private insurance provider, and the terms of the insurance plan will be provided to you before you close on your mortgage.

If you are paying for PMI, that cost won’t stay with you forever. Once you have reached 20 percent equity, either through paying down your loan balance over time or through rising home values; you can contact your loan servicer about removing PMI from your mortgage. Servicers must terminate PMI on the date that your loan balance is scheduled to reach 78 percent of the home’s original value.

How much does PMI cost?

The average range for PMI premium rates is 0.58 percent to 1.86 percent of the original amount of your loan, according to the Urban Institute. However, most borrowers will pay $30 to $70 per month in PMI premiums for every $100,000 borrowed. How much you will pay for PMI depends this key factors:

• Your loan-to-value (LTV) ratio – How much you put down will impact how much you’ll pay for PMI. For example, if you put down 5 percent, your LTV ratio would be 95 percent. If you put down 15 percent, your LTV ratio would be 85 percent. When you can only make a small down payment, the lender is assuming a bigger risk, and your PMI payments will be higher to account for that risk.

WHAT IS THE MINIMUM TIME I CAN KEEP A PMI ON FOR?

Another alternative is to refinance your mortgage, which will require an appraisal.

Refinancing to a regular mortgage, which can occur when the loan has been accelerated to a specified amount. However, a 50 percent down payment can eliminate the PMI.

WHAT IS THE PENALTY FOR DEFAULTING IN PAYING THE PMI?

Foreclosure occurs whenever a buyer defaults three times in a row.

Is there any advantage to paying PMI?

Paying PMI comes with one major benefit: the ability to buy a home without waiting to save up for a 20 percent down payment. Home prices are continuing to climb, hitting an all-time high of more than $353,000 for an existing property. A 30 percent down payment at that price would be more than $80,000, which can seem like an impossible figure for many first-time homebuyers.

Instead of waiting while saving, paying PMI allows you to stop renting sooner. Homeownership is generally an effective long-term wealth-building tool, so owning your own property as soon as possible allows you to start building equity sooner, and your net worth will expand as home prices rise. If home prices in your area rise at a percentage that’s higher than what you are paying for PMI, then your monthly premiums are helping you get a positive return on your investment on your home purchase.

Bottom line

Private mortgage insurance (PMI) add to your monthly mortgage expenses, but it can help you get your foot in the homeownership door. When buying a home, we check to see if the PMI will help you reach your real estate goals faster.