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Why you might need PMI when buying a house.

Dear Spark Financial Wellness,


I'm looking to get my first house soon, and I keep reading about private mortgage insurance. Do you know how much Private Mortgage Insurance (PMI) costs? Is this required for people with a low credit score? Anything else to be concerned about?


Thank you, Pat


A mortgage pre-approval application.

A)

Hi Pat,


Thank you for your e-mail. Let's start with a little background on what PMI is.


Private Mortgage Insurance (PMI) is an insurance policy that provides protection to the lender in the event that the borrower fails to make their mortgage payments. It is typically required by lenders when the down payment on a home purchase is less than 20% of the property's value.


PMI has it's benefits. It enables borrowers to secure a mortgage with a reduced down payment, increasing the accessibility of homeownership for individuals who may not have sufficient savings for a larger down payment. By paying for PMI, the borrower takes on the responsibility of covering the expenses associated with this insurance.


The main objective of PMI is to offer financial security to the lender in the event of borrower default. In cases where the borrower is unable to repay the loan, and the lender is unable to recover the entire outstanding balance through foreclosure and property sale, PMI assists in covering the remaining amount. Additionally, some lenders offer different options, such as lender-paid mortgage insurance (LPMI), which may have different cost structures.


It's important to note that PMI is not permanent. Once the outstanding loan balance reaches approximately 80% of the property's original appraised value (or the purchase price, whichever is less), the borrower can request the cancellation of PMI. Additionally, some loans have provisions that automatically terminate PMI when certain conditions are met. This is something to understand if you choose to not put 20% down on the home you are purchasing. Many times you will need to contact your lendor to have PMI removed.


It's crucial for you to consider the cost of PMI when calculating your monthly mortgage payments and overall affordability. The specific cost of PMI can vary based on factors such as the loan amount, credit score, and the terms set by the mortgage insurance provider.


The price of Private Mortgage Insurance (PMI) can fluctuate based on factors like the loan amount, down payment, credit score, and the specific terms outlined in the mortgage insurance policy. Generally, PMI costs range from 0.5% to 1% of the loan amount on an annual basis.


To provide a rough estimate, let's consider an example. If you have a $200,000 loan and your PMI rate is 0.8% per year, the annual PMI cost would be $1,600 ($200,000 x 0.008). This amount would typically be divided into monthly payments, resulting in an additional cost of approximately $133 per month.


When considering a mortgage, it's advisable to consult with lenders or mortgage insurance providers directly to obtain accurate and up-to-date information regarding the specific cost of PMI for your situation. They can provide you with detailed information on the premiums, how they would apply to your mortgage including how to have PMI removed from your monthly payment.


If you would like discuss this further, please setup an appointment on our website.


Take care, Spark Financial Wellness

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