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What is PMI? And how does it help me?

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What is PMI? And how does it help me?

By: Mike DeKuiper

PMI is a term in the lending world that stands for Private Mortgage Insurance. In certain situations, your lender may require you to pay PMI in different situations. PMI is a huge benefit to many buyers as it allows you to purchase a home without having to put a large chunk of cash saved for a down payment.

PMI seems to be a “scary” word and many people attempt to avoid it in any way that they can, however, without PMI, you would have to put 20% of the purchase price of the home as a down payment. Since not many people have this amount of money stashed away, PMI gives you the opportunity to purchase a house with less money down. Here are the different loan programs that require PMI, and what to expect when you are buying a home:

Conventional: PMI is required when you have a loan amount above 80% of the appraised value of the home, hence the typical idea of putting 20% of the purchase price as a down payment. PMI will automatically “fall off,” or stop needing to be paid, at 78% of the value of the home, but can be requested to be cancelled when you have hit 80% of the value of the home. You can always request an amortization schedule, which shows how each monthly payment is divided up, from your lender, giving you the power to best utilize when you are at the 80% value rating.

With Conventional loans, your lender should have the opportunity to shop for the best PMI rates across different companies that offer PMI, and your rate will be determined by your credit score, your loan amount compared to the value of your home, and the price of the home.

FHA: PMI will always be required on an FHA loan, but at different rates. If you more than the minimum of 3.5% down payment, but less than 10% down payment, you will be required to pay PMI at a rate of 0.85% throughout the life of the loan, but is calculated on an annual basis.

For example:

Purchase price: $200,000

Loan Amount: $193,000 (3.5% minimum down payment)

PMI Amount: 0.85%

Calculation: 193,000 x 0.0085 = 1,640.50 ; 1,640.50 / 12 = $136.71 – your monthly PMI

When you put more money into the down payment of a house on an FHA loan, starting with at least 10% for the down payment, you will pay your monthly mortgage insurance at a lesser rate, and it will typically only last for 10 years rather than the life of your loan.

Furthermore, FHA loans do have an upfront mortgage insurance payment, to be paid when you close on your new home, at a fee of 1.75% of the new loan. Using the same example as above, the upfront MI would be: 193,000 x .0175 = $3,377.50

USDA Rural Development: similar to an FHA loan, a USDA loan will require PMI for the life of the loan, but at a different rate. They are also required throughout the life of the loan, without a forgiveness period regardless of how much you put for a down payment. PMI for a USDA loan is calculated at 0.35% of the loan amount, which is less than the FHA. They also have a lesser amount of upfront mortgage insurance, at a rate of 1% of the loan amount. For example:

Purchase Price: $200,000

Loan Amount: $200,000 (0% down payment)

PMI Amount: 0.35%

Calculation: 200,000 x .0035 = 700 ; 700 / 12 = $58.33 – your monthly PMI

VA Loans: VA loans are great in that they do not require PMI. From all of us here at Stockton Mortgage, thank you for your service.

As always, there is a reason for a mortgage professional, and we would always recommend that you speak with your preferred lender for each different situation. If you have any questions or would like to get started, please don’t hesitate to reach out. We are here to answer any questions that you may have!

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