What Is PMI And Who Pays For It?

What Is PMI?

One of the most common questions I often get asked by my borrowers is what is PMI? There are two types of mortgage insurance , mortgage insurance premium and private mortgage insurance ( PMI ). Mortgage Insurance Premium is for FHA Loans and Private Mortgage Insurance are for Conventional Loans. Mortgage Insurance, whether it is FHA Mortgage Insurance Premium or Conventional Private Mortgage Insurance is paid by the mortgage loan borrower for the benefit of the mortgage lender in the event if the mortgage borrower defaults on his or her mortgage loan and the mortgage loan defaults and goes into foreclosure. Some of the questions I get asked often about mortgage insurance is how much does mortgage insurance costs, how can I avoid paying private mortgage insurance and when and how can I cancel my private mortgage insurance on my mortgage loan.

What Is PMI?

PMI stands for Private Mortgage Insurance. Private Mortgage Insurance has no benefit to the mortgage loan borrower. It does not insure the homeowner against anything and the purpose of private mortgage insurance is for insuring the conventional mortgage loan in the event if the conventional mortgage loan borrower defaults on their mortgage loan and the conventional mortgage loan goes into default. A home buyer who has a conventional loan with less than 20% down payment, private mortgage insurance will be required. Private Mortgage Insurance, PMI, insures and protects the mortgage lender in the event if the mortgage loan borrower stops making mortgage payments on their conventional loan. The borrower pays the private mortgage insurance and is paid monthly as part of their mortgage payment. Homeowners can cancel private mortgage insurance after a few years of paying for private mortgage insurance if you can pay down your mortgage loan balance to a certain amount and/or if your home appreciates in value. This is a great benefit for conventional loans where homeowners have the option of canceling their private mortgage insurance if they have enough equity required by the mortgage lender where with FHA Loans, FHA mortgage insurance premiums on 30 year fixed rate mortgage loans cannot be canceled and needs to be paid for the life of the FHA Loan.

What Is PMI And How Much Does It Cost?

It is easy to calculate FHA annual mortgage insurance premium because it is set at 0.85% of the FHA mortgage loan balance no matter what the borrower’s credit scores are or whatever the loan to value is. However, there are moving parts in how much private mortgage insurance costs and it depends on the borrowers credit scores, the down payment on a home purchase, and the loan to value on a refinance mortgage loan. The lower the borrowers credit scores, the higher risk the borrower is classified by the mortgage insurance company and the higher the loan to value, the higher risk the mortgage insurance company classifies the mortgage loan applicant so the costs will be higher. FHA Loans have reduced their FHA annual mortgage insurance premium to 0.85% from 1.35% earlier this year and FHA Loans have lower mortgage interest rates than conventional loans since all FHA Loans are insured by the government against default. Many times the private mortgage insurance on conventional loans are much higher than the FHA annual mortgage insurance premium for conventional loan borrowers with credit scores of under 680 FICO and those only putting down 3% to 5% down payment on conventional loans. Before jumping into a conventional loan program, shop and compare which loan will be better for you; FHA Loan Versus Conventional Loan.

What Is PMI And How Can I Cancel PMI?

One option you have with conventional loans that you do not have with FHA Loans is that you can cancel your Private Mortgage Insurance either by paying down your mortgage loan balance so it comes to 78% Loan To Value or if your property appreciates in value where you have 22% equity in your home or 78% Loan To Value.

What Is PMI And What Is Lender Paid Mortgage Insurance

Conventional mortgage loan borrowers can opt not to pay private mortgage insurance separately and choose to have the mortgage lender pay private mortgage insurance through Lender Paid Mortgage Insurance  , also referred to as LPMI. However, nothing in this world is for free and with lender paid mortgage insurance, the mortgage loan borrower does not pay private mortgage insurance and the private mortgage insurance is paid by the lender, however, it comes with a price. Lender Paid Mortgage Insurance is available for conventional mortgage loan borrowers where the lender pays the private mortgage insurance premium in lieu of a higher mortgage rates. Depending on the individual conventional mortgage loan borrower, this may or may not be a better alternative. The negatives of the lender paid mortgage insurance is that once it is set, you cannot change it when you have more than 20% equity in your home where with private mortgage insurance you can cancel the private mortgage insurance once your loan to value reaches 80% loan to value. Private mortgage insurance automatically cancels when your loan to value reaches 78% loan to value.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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