What You Need to Know About Private Mortgage Insurance | St. Johns Bank
Private mortgage insurance is an important part of homeownership for most Americans and makes that dream possible for a lot of first-time buyers.
Still, it’s an added expense many people don’t know to expect going into the purchase process and one even those who’ve paid for years, maybe even more than once, don’t understand. Here are some of the important points you need to know, whether you’re trying to figure out why you’re paying that extra fee each month or hoping to make sense of everything ahead of you when you make your first real estate purchase.
Important Details of Private Mortgage Insurance
It makes it possible for more people to buy houses. Private mortgage insurance (PMI) is protection for lenders against defaults. It assures them some money if a borrower can’t pay, which makes it easier for them to lend to those who don’t have sizable down payments.
It’s often required if you don’t have 20%. Lending to people who don’t have a lot saved for down payments was once a risky move for banks, but PMI gives them protection that makes loans easier to get. The typical threshold is 20%. Once you reach that level of equity in your property, you can cancel your PMI and get rid of that added expense. Even if you don’t make that request, it will automatically terminate when your principal balance reaches 78% of the original value of the home.
It isn’t homeowners insurance. PMI doesn’t provide protection for the buyer or the property; it’s only coverage for the lender.
Most homebuyers need it. The National Association of Realtors says the median down payment in the United States is only 12% of the cost. First-time buyers average only 6% of the value, while the average for repeat buyers is 16%. That’s a lot of homebuyers who may have to pay PMI.
You may pay it upfront, in monthly payments or through a combination. Monthly payments are the most common way PMI is paid, typically as part of your mortgage statement, so you don’t really even have to think about it. Alternatively, you may be given the option or required to pay some or all the cost upfront.
The cost varies. The cost of PMI is based on your loan-to-value ratio, which means the amount you still owe compared to the value of the property. Typically, the rate is between .05 and 1% of the loan. The exact rate will be explicitly stated in your loan estimate and in the closing disclosure documents.
The mortgage experts at St. Johns Bank have the expertise and knowledge to give you confidence as you move toward homeownership, whether you’re a first-time buyer or just looking for a new place.