Avoiding Paying PMI On Mortgage Loans By Homeowners
This ARTICLE On Avoiding Paying PMI On Mortgage Loans By Homeowners Was PUBLISHED On October 20th, 2019
Avoiding Paying PMI On Mortgage Loans By Homeowners can be done.
- A large percentage of our borrowers at Gustan Cho Associates are homeowners who want to save money by Avoiding Paying PMI by refinancing
- FHA and Conventional Loans are the two most popular mortgage programs in the U.S.
- HUD requires annual FHA MIP of 0.85% for the term of a 30-year fixed-rate loan
- This holds true no matter what the loan to value is. Conventional Loans are different
- Conventional Loans are not government loans like FHA Loans are
- There are three different types of government loans: FHA, VA, USDA
- Private Mortgage Insurance is required on conventional loans if the loan to value exceeds 80%
In this article, we will cover and discuss Avoiding Paying PMI On Mortgage Loans By Homeowners.
Purpose For Private Mortgage Insurance
Mortgage Lenders are in the business of lending money.
- The property they secure is to protect themselves in the event the borrower forecloses
- Lenders do not want the property
- They will do everything they can to avoid foreclosure on a defaulted mortgage
- Borrowers who put 20% down payment is showing they have skin in the game
- Borrowers who put 20% of their hard-earned money will do everything possible not to foreclose on their home loans
- However, borrowers who only put a 3% to 5% down payment, the risks are higher for lenders
- If a homeowner with 20% or more in equity forecloses, the lender can minimize their losses due to the high equity position
- This is why private mortgage insurance is required on conventional loans with less than 20% equity
- Government loans mandate mortgage insurance
- Lenders can offer little to no down payment government loans at low mortgage rates due to the government guarantee
- Private Mortgage Insurance is paid by the borrower to benefit the lender
- Borrowers have no benefits from PMI
- Private Mortgage Insurance has made homeownership possible for homebuyers with little down payment
Without private mortgage insurance, many families will have to wait to become homeowners until they have a 20% down payment saved. PMI allows homebuyers to purchase a home sooner. With conventional loans, private mortgage insurance protects taxpayers and the government from losses due to foreclosure. Avoiding Paying PMI can only be done if homeowners have a 20% equity position in their homes.
How To Avoid PMI By Homeowners
In this paragraph, we will discuss conventional loans and private mortgage insurance.
- Conventional Loans are often referred to as conforming loans
- This is because conventional loans need to conform to Fannie Mae and/or Freddie Mac Guidelines
- If they do not conform, Fannie Mae and Freddie Mac will not purchase these loans on the secondary market from lenders
Karen Cordes, the Chief Mortgage Underwriting Manager at Gustan Cho Associates says the following:
PMI offers unparalleled risk protection to Fannie and Freddie. By design, PMI promotes stability because coverage agreements with lenders require full underwriting and it stands in front of the government in a so-called “first-loss position” (different from most other forms of credit enhancement). Every dollar paid by PMI to cover losses is a dollar the government — and therefore taxpayers — don’t have to pay. Conventional loans with PMI have a 40 percent lower loss-severity rate than loans without PMI. It also noted that for nearly 20 years, conventional loans with PMI have revealed lower loss severity each origination year. Since both Fannie and Freddie entered conservatorship, the PMI industry has covered more than $50 billion in claims, which represents 100 percent of valid claims since the financial crisis — 97 percent paid in cash and the remainder due over time.
As mentioned earlier, the main purpose of private mortgage insurance is to benefit the lender. However, the lender does not pay for PMI. It is paid by the borrowers. Due to PMI, Fannie Mae and Freddie Mac can offer special low down payment conventional loan programs for first-time and seasoned homebuyers.
Paying PMI On Home Purchases
Homebuyers who put 20% down payment on conventional loans do not have to purchase private mortgage insurance.
- Homebuyers who put less than 20% down payment can avoid paying PMI if they go with the Lender Paid Mortgage Insurance (LMPI) conventional loan program
It is a one time PMI premium where no monthly mortgage insurance is required.
Paying PMI On Refinances
On refinances, by federal law, once a homeowner reaches a 78% LTV or 22% equity in their home, the private mortgage insurance needs to cancel automatically. At 80% LTV and/or after 20% of mortgage payments paid, the homeowner can request the cancelation of PMI. For more information about this topic and/or other mortgage-related topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at email@example.com.