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PMI? What the heck is that?

You hear the term PMI thrown around a lot when looking to purchase a home but oftentimes people aren’t quite sure what it is. PMI stands for Private Mortgage Insurance and in a nutshell, is a protection measure for lenders in case you default on your loan and end up in foreclosure. Loans that are backed by the government, FHA and VA loans, for example, are INSURED by the government and if you default on those loans, the government stands in the middle and ensures lenders still get their money. Conventional loans, however, are not backed by the government and often lenders will require Private Mortgage Insurance to protect them in the event you fail to make your loan payments.

It’s important to know that PMI protects the LENDER and not you, the borrower.

Who needs it?

If you are purchasing a home using a conventional mortgage and have less than 20% down or have a less than ideal credit score, you should plan on PMI being required by your lender.  The good news is, PMI gives you options when qualifying for a mortgage.

But I don’t want it!

PMI policies can be costly- anywhere from .3%-1% of the loan depending on your credit score and down payment amount. Generally, the lower your score or down payment, the higher your PMI payments will be. These payments are included in your monthly mortgage payment, similar to homeowners insurance and taxes. To avoid paying more than you need to, consider these options:

1.    Explore your loan options. Here’s where a professional can help. Your REALTOR can help point you in the right direction when it comes to different loan options and your mortgage broker can tell you which options you qualify for. Government-backed loans, like FHA or VA, are one solution- especially if you have less than ideal credit or not much money to put down. The downside to these loans is that they often take longer to close than a conventional loan. Interested in learning more? Read this post and get started buying your next home. 

2.    Save up that 20% down. It might take you a little longer but you will look better to lenders, can avoid PMI payments and even possibly get a lower interest rate.  Remember, the more you have for a down payment, the lower your PMI. If you are ready to purchase but only have 15%, you are still looking at a lower policy payment.

3.    Give it time and then cancel it. Most people don’t realize that PMI doesn’t have to stick around for the life of your loan. Sure at the beginning, you only put down 10%. But over time you have been paying the principle down on your mortgage and now your loan balance falls below 80% of the original loan value- known as your loan to value ratio. This is the perfect time to call your lender and request that your PMI be canceled. Be sure you are watching your payments and know what balance you need to reach to be able to cancel the policy to avoid paying longer than necessary.

If a PMI policy is your only option, don’t let it stop you from buying the home of your dreams. Make sure you work with a loan company you trust and that answers all of your questions. Most importantly, if you are required to pay PMI, know your loan to value ratio from the beginning to avoid paying more than you need to.

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