What You Will Learn in This Article (Reading Time – 5 Minutes):
- What Private Mortgage Insurance is
- When do you need Private Mortgage Insurance
- How much can you expect to pay for Private Mortgage Insurance
Private mortgage insurance is a term that most people are not familiar with until they apply for their first home loan. Then, it usually becomes a significant concern for home loan applicants as well as homeowners. This is because this type of insurance may be required by the lender, and it can be expensive. In fact, it can even limit the loan amount that you can qualify for and can impact your budget for years. Because of how significant the impact of this type of insurance can be on your life, you need to learn more about what it is and how you can potentially benefit from or avoid it.
What Is Private Mortgage Insurance?
When lenders underwrite loan requests, they look at their overall exposure to risk. Essentially, they want to know how likely you are to default on the loan. Many people who make a very small down payment on a home may be increasingly likely to default. This is because they will have a larger loan payment as well as less equity available in the home. Without substantial equity, selling the home when needed can be challenging or impossible. Lenders obtain insurance on low down payment loans to cover their risk, and they pass this expense on to you. Private mortgage insurance is usually required on any loan that exceeds 80 percent loan-to-value. This is an almost universal requirement, so it is not possible to shop around and find a lender that does not have this requirement for high loan-to-value loans.
What Is the Cost of Private Mortgage Insurance?
The cost of private mortgage insurance can vary from approximately one-half to one percent of the original loan amount. The premium is usually paid in monthly installment payments, and this cost is tacked onto your total monthly mortgage payment. For example, if you have a one percent premium on a $250,000 mortgage, the premium would be $2,500 per year or a little more than $200 per month. This means that your mortgage payment would increase by more than $200 each month. As you can imagine, this can be an expensive burden for a homeowner to shoulder, and it can also reduce the loan amount that you may qualify for. This is because the total cost of your new monthly housing payment will be taken into account when your loan request is underwritten.
How Can You Avoid Private Mortgage Insurance?
Many home buyers would love to avoid paying the high cost of a private mortgage insurance premium altogether. After all, this can seem like wasted money. There are two main ways to avoid paying this premium with your mortgage payment. First, you can make a larger down payment on your purchase. With at least a 20 percent down payment, the private mortgage insurance requirement would be removed from your loan. You may need to save up additional money to make this large of a down payment. Second, you can set up a first and second lien loan structure with your lender. For example, if you only want to put five percent down on your purchase, you can get an 80 percent first lien and a 15 percent second lien. As long as the first lien is less than 80 percent loan-to-value, the PMI may not be required. Keep in mind that a second lien may have a substantially higher interest rate, and this can affect your total monthly housing payment. Therefore, in some cases, it may be more affordable to use the private mortgage insurance option. A smart idea is to review several loan scenarios with and without the PMI payment before deciding which one you should move forward with.
How Can You Remove Private Mortgage Insurance?
If you already have a loan with private mortgage insurance on it, you may be wondering how you can eliminate it. After all, you could save several hundred dollars per month or more by doing so. There are a few steps you may take to remove it. Some lenders will automatically remove it when your loan balance falls below 80 percent loan-to-value. However, because the lender may not know your current property value, the lender may wait until the balance is less than 80 percent of the original sales price before automatically removing it. Some lenders may accept an appraisal that shows your current property value as proof that you have more than 20 percent equity in the home currently, and you can request review of your loan to remove the PMI payment. However, you will need to pay for the appraisal. Another way to remove PMI is to refinance your mortgage. If you plan to refinance your loan anyway, this may be an easier option to pursue.
Can You Deduct Private Mortgage Insurance Payments?
The rules regarding deducting private mortgage insurance payments vary periodically. Some years, your private mortgage insurance payments are deductible along with your mortgage interest. Other years, the premium is not deductible. This can affect whether you want to move forward with a second lien structure to avoid the premium. Consider that the mortgage interest on the second lien is deductible, and the private mortgage insurance premium may not be in some cases. Therefore, the most cost-effective option for some situations may be to take advantage of tax deductible interest on a second lien.
Evergreen Properties and Investments is committed to helping Long Beach area residents achieve their homeownership goals. If you are preparing to purchase a new home in the local area, it makes sense to first speak with a mortgage broker or lender about your financing options. You can get pre-qualified for the financing that is needed to make your home purchase. Then, one of our friendly real estate agents at Evergreen Properties and Investments can help you to find the ideal home for your needs that is priced within your budget. We can refer you to excellent lenders or brokers upon request. Contact us today to learn more about how we can help you with your home buying plans.
From the Author: My name is Dan Barcelon and I believe that Real Estate can be one of the most valuable assets you’ll ever own. I’m dedicated to educating and guiding my clients on how to manage and leverage their homes to create an Evergreen legacy for themselves and their family. I primarily consult both home buyers and home sellers on reaching their personal and financial goals through Real Estate in the following cities of Southern California: Long Beach, Carson, Cerritos, Signal Hill, Torrance, Lakewood, Cypress, Downey, Bellflower, Norwalk, Wilmington, La Palma, and Artesia.
If you’d like to discuss if buying, selling, or investing in real estate is right for you at this time, feel free to reach out. You can call/text me at 562-270-5812, or you can e-mail me at danb@EPIrealestate.biz.