10/5/2022
We all know that the application process for a conventional or government-insured mortgage can be long and complicated. There are a lot of factors to consider. In this case we are going to focus on the Private Mortgage Insurance (PMI).
What is the Private Mortgage Insurance
Private Mortgage Insurance (PMI) is a policy that you must take out in the event that you do not meet the 20% down payment for a conventional mortgage loan.
Since the bank or lender estimates that it can recover 80% of the value of the home during a foreclosure when you stop paying, it demands this requirement to cover the remaining 20%.
Private Mortgage Insurance is not designed to give you any benefit, but rather to protect whoever is giving you the financing. The explanation for its application is based on the fact that the bank assumes greater risk if you cannot get the money requested in advance. Therefore, it needs another type of guarantee in case you do not comply.
- Interest: From 4.75% to 5.75%
- Max term: 30 años
- Interest: Consult
- Max term: 30 años
- Interest: First years fixed-rate and the rest adjustable: SOFR + margin
- Max term: 30 años
- Interest: SOFR + margin
- Max term: 30 años
- Interest: From 5.125%
- Max term: 30 años
This requirement does not work the same way for government-backed mortgage loans, such as FHA or USDA. Another important fact about PMI is that it does not prevent you from having points taken off your credit score when you fall behind on your monthly payments, nor does it prevent you from being subject to foreclosure.
How is Private Mortgage Insurance applied?
The charge for private mortgage insurance varies from one institution to another depending on internal policies. Generally, this prime is included in the monthly payment assigned to amortize the loan granted.
The only advantage of this procedure is that you do not have to make another transfer or deposit to pay the extra amount charged.
It is also possible that the lender or bank will give you the opportunity to cancel the PMI through a one-time payment at the time of signing the contract.
That is, you can add the additional amount to the mortgage loan or pay cash. In other cases, the entity may apply a combination of methods, such as a part in advance and another part in the monthly payments.
How long does Private Mortgage Insurance last?
According to banking logic, most financial institutions usually allow you to stop paying PMI once you reach 20% of the price of the purchased home.
This means that you should have a loan-to-value ratio of 80%, which will depend on the percentage of down payment you have advanced and the capital repaid in monthly installments.
On the other hand, it is common for some entities to ask you for additional payments so that you do not have to continue paying Private Mortgage Insurance. It is not uncommon for a bank to not allow you to get rid of the policy if you have a second mortgage or if your payment history shows that you did not pay an installment on time.
Ways to avoid PMI
In this situation, the ideal situation would be to wait to raise the 20% down payment or pay for the home in full with cash. Unfortunately, not everyone has that luxury, so there are other alternatives to make private mortgage insurance less expensive:
- Piggybacking. This practice involves applying for 2 loans, one for the main mortgage and another, with more interest, for the 20% down payment. This way, you don't have to pay PMI and you have the option to deduct the interest on both loans by specifying each one during the tax return.
- Pay more with the installment. As long as you have healthy finances and it is possible to come up with the extra money, this is a possibility. The idea is to pay a little more principal each month so that you can reach the desired 20% amount and stop paying insurance sooner.
- Re-appraise the home. You should not rule out the possibility that your home may increase in value due to different circumstances. The capital gain from improvements in the area means more equity in your name. However, you will have to pay for the new appraisal and ask your lender to remove PMI if you have 20% or more.
Practical example of Private Mortgage Insurance
Assuming you want to buy a $200,000 USD home, the PMI calculation (0.55 to 2.55%) will depend on the bank and the down payment. If you get 10% down payment and the prime interest is 1%, we have the following:
- Home value: $200,000
- Down payment amount: $20,000
- Total loan: $220,000
- PMI monthly premium at 1%: $183.33
- PMI annual premium: $2,200
PMI is an expensive requirement that affects your liquidity to pay off a conventional mortgage. At Busconómico we know this, that's why we offer you our specialized advice and the best mortgage offers in the market.
Español: Qué es el PMI (Private Mortgage Insurance)