You don’t want to part with your hard earned money, so you need to know the benefits of taking out private mortgage insurance when you get a mortgage for a new home. Generally, the purchase of a new home means that you have to save up money for several years to have enough for the required down payment, that is usually 20% of the purchase price of the home. A typical single family dwelling now sells for at least $200,000, so that means you would have to have $40,000 saved up. With private mortgage insurance, you don’t have to wait until you have all that money saved because one of the main benefits of having such an insurance policy is to lower the amount of your down payment. This is available only on conventional loan products.
The advantages to having private mortgage insurance for the borrower. When you take out a policy you to pay a lesser percentage amount as a down payment. The minimal down payment is 5% with PMI. This insurance is required if you borrow more than 80% of the total purchase price of a home or if you are over 80% Loan to value (LTV) on a refinance.. For example, on a home that costs $200,000, with 5% down payment you would only have to come up with $10,000 down payment plus cost. This is a difference of $30,000 under regular circumstances of 20% down.
Private mortgage insurance is an insurance policy that you take out to assure a lender that they will receive the money back if you should default on the loan since you are not putting the 20% down deemed by Fannie Mae and Freddie Mac. This is not the same as having life insurance on the mortgage and you will not receive any financial gain from the insurance if you are disabled or if you die. The insurance will not pay off the loan for you in either of those cases. It is simply for the protection of the lender for offering you the opportunity for a lesser down payment.
Another benefit of having private mortgage insurance is that once your unpaid balance goes below the 80% (normally 78%) of the total purchase price, you can cancel the insurance and you don’t have to pay any more premiums. Some insurance companies do this automatically, but you have to watch out for it as well. Once again, you can request that the lender cancel the policy when you have repaid 20% of the mortgage amount.
When determining whether or not it is time to cancel the policy depends solely on the unpaid balance of your loan. If you have made improvements to your home and the value has increased, this has nothing to do with cancelling the policy. No appraiser will come to inspect your home. Just keep in mind that the decrease will not happen overnight. With the interest charges on the mortgage, it could take 10 or 15 years before you have 20% of the mortgage repaid if you just pay the minimum monthly payment and no additional amount to your principal balance.
Keep track of your payments on the principal of the mortgage. When you reach the point where the loan-to-value ratio hits 80 percent, notify the lender that it is time to discontinue the PMI premiums. Federal law requires lenders to tell the buyer at closing how many years and months it will take for them to reach that 80 percent level and cancel PMI. Lenders must automatically cancel PMI when the balance hits 78 percent.
Is PMI right for you? As always please contact an ENG Lending loan officer to discuss the conventional loan options as well as any other loan program options to see which program fits your specific loan the best.
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