First Time Home Buyer: What is Private Mortgage Insurance (PMI) When Buying a House?
When you buy a house in Phoenix AZ and you are getting mortgage, your lender will look at the amount of your down payment compared to the sales price. This is to determine your loan to value ratio aka LTV ratio.
To calculate loan to value ratio, your lender will take the amount of the loan and compare it to the current value of your house. For example, if you purchase a home for $200,000 and put $20,000 down, your loan to value ratio is 90%. Typically, if your loan to value ratio is more than 80%, you will be required to pay Private Mortgage Insurance aka PMI.
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What is Private Mortgage Insurance?
Private mortgage insurance is an actual insurance policy issued by an private insurance company that benefits your lender. When you apply for a mortgage, the lender wants to make sure your home will have enough equity to pay off the loan balance should you default and go into foreclosure. If your home goes into foreclosure and the lender is not able to recoup the outstanding balance by selling the home, the insurance company that issued your PMI will pay the lender the difference.
Who Need Private Mortgage Insurance?
Typically on a conventional loan, if your down payment is less than 20 percent of the value of the home, lenders will require you to carry mortgage insurance. Usually, you pay those mortgage insurance premiums until your loan-to-value ratio (LTV) hits 80 percent.
What Does Private Mortgage Insurance Cost?
Conventional Mortgage insurance rates vary, usually, the lower your down payment and/or the lower your credit score, the higher the premiums — but typically the premiums can range from $30-70 per month for every $100,000 borrowed. The PMI premium is paid monthly as part of your mortgage payment. If you look at your monthly mortgage statement and see a line for “PMI,” that’s you private mortgage insurance.
How to Avoid Paying Private Mortgage Insurance?
Once you home has 20% equity, you can write to the insurance company and ask them to cancel your PMI coverage. You lender will require an appraisal to ensure your home has 20% equity.
Swee Ng, Realtor and Phoenix East Valley resident specializing in win-win real estate transaction through great communication and fighting for his clients’ best interest. After all, this is more than real estates, this is about your life and your dreams.
If you are looking to buy or sell your home in Phoenix AZ area, we hope you will consider us. Contact us today for complimentary consultation.
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