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3 Things You Need To Know About PMI In Las Vegas
Dated: October 21 2021
Lets start with understanding what is PMI?
Private mortgage insurance (PMI) is the insurance coverage some lenders require when the borrower doesn’t make a large enough down payment. Even though borrowers pay for it, PMI doesn’t protect them. It’s there to protect the lender against a major financial loss if the borrower is unable to repay the loan. If that happens and the property goes into a short sale or foreclosure auction and there’s not enough equity to cover the loss, PMI will fill the gap for the lender. PMI is an extra cost for buyers, but paying it can be the right move to get them into a home that would be out of reach with the down payment they can bring to it.
1. Who needs PMI?
Lenders require purchase mortgage insurance when borrowers buy a home and finance it with a conventional mortgage and a down payment of less than 20% of the purchase price. Conventional mortgages are available with down payments of as little as 3%, so many of these loans come with the PMI requirement. If the borrowers can’t qualify for a conventional loan, they might consider an FHA loan, available with down payments as low as 3.5%, and these also require FHA mortgage insurance.
2. What does PMI cost and how does the borrower pay for it?
The cost depends on the lender and the size of the borrower’s down payment. PMI is figured as a percentage of the total loan amount, generally ranging between 0.58% and 1.86%. PMI cost is influenced by the loan size and the loan-to-value (LTV) ratio—the loan size compared to the total value of the property—the higher the LTV, the higher the PMI cost. Higher borrower credit scores can also lower the PMI cost. With conventional mortgages, borrowers can pay the PMI up-front with their closing costs and then annually, or they can roll the premium cost into the loan and pay slightly higher monthly payments. FHA mortgage insurance premiums are paid in two parts—an up-front mortgage insurance premium (UFMIP), and an annual mortgage insurance premium (annual MIP). The UFMIP is 1.75% of the loan amount, which borrowers can pay at closing or have it rolled into the mortgage with a higher monthly payment. The annual MIP is split up into equal monthly installments rolled into the mortgage payment. It is 0.45% to 1.05% of the loan amount depending on the loan term and size.
3. When can the borrower stop paying PMI?
Lenders must cancel PMI when the borrowers’ monthly payments have paid down the principal so they have 20% equity—an 80% LTV—in the home. But this doesn’t happen automatically—the borrower has to contact the lender to make sure the PMI is canceled. The borrowers can also stop paying PMI if their home’s value increases so that they now have more than 20% equity in it. The borrowers have to have their home reappraised and get in touch with the lender if they owe less than 80% of the newly appraised value. They are also responsible for the cost of the appraisal. With FHA loans, if borrowers put 10% or more down, the annual MIP can be canceled after the first 11 years of the loan. But FHA loans with a down payment below 10% require borrowers to pay the annual MIP for the life of the loan. The only way to eliminate it is for borrowers to refinance into a conventional mortgage without PMI once their LTV ratio is low enough for them to qualify.
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