Thinking about purchasing a home? First things first – congratulations! Whether you are buying your first home, or your family is growing (congrats again!), or you’re simply upgrading, this is such an exciting time.
Buying a home – especially if you are a first time home buyer – is daunting, no way around that. From selecting a realtor to picking THE house, finding the best interest rate for your loan, and then there are all of those papers to sign before they hand over your new house keys.
And THEN you get to do the actual moving. I’m exhausted just thinking about it.
One of the least understood things about purchasing a new home is Private Mortgage Insurance, better known as PMI.
What is Private Mortgage Insurance (PMI) and Why You Don’t Want It
PMI is not for the home BUYER, it is for the LENDER. It does absolutely nothing for you as a home owner – except increase your monthly payment.
In regards to a conventional loan
Going into your new home loan, if you have less than a 20% down payment saved up (which we all know can be a LOT of money to come up with at once, especially if you’re a first time home buyer without equity built up in your current home) you’ll pay PMI. For example, on a $100,000 home this would be a staggering $20,000 up front.
If you can’t come up with the $20k, your lender will calculate the loan-to-value ratio of your new home. Until you reach the 80/20 ratio, you will be forced to pay PMI, which is typically calculated at a rate of $55 per $100,000. Come again?
Here’s how it works:
For the sake of math, I’m keeping it simple. Cause, you know… math. 😛
Say you buy a $108,000 home, and you have an $8,000 down payment saved up. Your loan will be around $100,000 (there are fees added on and multiple other variables, and possible closing costs etc but remember: math) after your down payment is applied. This means that your monthly PMI payment will be $55-ish on your $100,000 loan.
You will pay that extra $55 on top of your mortgage payment every. single. month. until you have made enough mortgage payments (additional principal payments or rounding up your payment up is ALWAYS a good idea!) that the LOAN amount on your home is 78% or lower than the VALUE of your home itself.
So, let’s say that the home you purchased is WORTH $110,000. You will continue to pay PMI until your LOAN amount is down to $85,800-ish. Remember: math. 😀
While the PMI will drop off of your mortgage payment all by itself when you hit a 78% loan-to-value ratio, you can request that it be removed at 80%. This is huge!
This means your loan only needs to be at $88,000-ish instead of $85,800! There are quite a few mortgage payments in between those numbers.
Want to quit paying that PMI quicker? Of course!
You could do some upgrades to your home that increase the value. Or, you could make additional payments toward principal. When you go to request that the PMI be removed, you may be required to provide a current appraisal of your home, proving its current value.
The path you choose is all dependent on the monetary value of the upgrades done to your home. If you have simply made your on-time payments, or if you have made small (but effective!) extra principal payments, you won’t need to prove the value of your home as it has not really changed. It has, but maybe not enough to warrant paying to have your home appraised again.
Getting your home re-appraised (an average cost of $300-$500) could be worth it, but typically only if you make enough upgrades to increase the value of your home significantly. If you’re paying $55 in PMI per month, and you pay $400 to have your home re-appraised, you would make up the difference in just seven months of payments. That could take you years to get removed without the re-appraisal.
Note from my friend Pamela, a fantastic realtor in the Wichita area:
If a buyer utilizes an FHA loan with the minimum 3.5% down payment, they will be charged a 1.75% up-front fee that is normally financed into their loan as well as paying a monthly FHA PMI premium that never goes away (unless they put 10% down and if they were doing that they should consider a conventional loan).
Want to know how close you are to being able to request it to be dropped? Your lender will have all of that information for you. They may need to crunch some numbers, but request that puppy be pulled off as soon as possible!