All home buyers will have to pay for homeowners insurance, but some buyers will also have to pay for additional insurance coverage – private mortgage insurance or PMI. This kind of insurance, however, doesn’t provide protective coverage for the homeowner. Rather, it is intended to protect the lender, typically when buyers pay less than 20% down because the lender will, in this case, view the mortgage loan as a riskier investment. But there are some ways to avoid paying for PMI, even with a smaller down payment. So read on to discover what Hudson home buyers need to know about PMI.
Overview of PMI
Private mortgage insurance or PMI is a species of insurance required by conventional lenders when buyers pay less than 20% of a home’s purchase price in the form of a down payment. This kind of insurance protects the lender (not the homeowner) if the owner/buyer defaults on the loan.
Although PMI doesn’t provide any protection against foreclosure, it does allow people who can’t afford a 20% down payment to become homeowners. If you’re in that boat, your lender will coordinate with a private insurance provider to determine whether and how much you will pay for PMI.
The good news is that you won’t have to pay for PMI throughout the whole life of your loan. Once you’ve reached 20% equity, you can have the PMI charge removed. This can happen either through paying down your loan balance or by your home’s increasing in value (or through a combination of both). Typically, servicers are required to terminate the PMI when your loan value reaches 78% of your home’s original value.
The Cost of PMI
So how much will you have to pay for private mortgage insurance? It usually runs, annually, between 0.4% and 2.25% of the whole mortgage loan amount. And that can increase your monthly mortgage payment by not a little.
How much you’ll actually pay for PMI as a Hudson home buyer depends primarily on two factors . . .
- Loan-to-value ratio – This ratio is determined by how much you put down. For example, if you put 15% down, your loan-to-value ratio will be 85%.
- Credit score – Credit history and credit score also play a role in how much you’ll pay for PMI. The higher your credit score, the less you’ll pay.
How to Avoid PMI
Now there is a way for Hudson home buyers to avoid paying for PMI – even when they put down less than 20%.
If you can’t afford a 20% down payment, you can get around PMI by taking out two loans. One loan, of course, will be the mortgage to buy the home, and the other will be a smaller loan to cover the 20% down payment – a practice known as “piggybacking.”
Doing this will allow you to have a smaller monthly mortgage payment because the PMI charge won’t be added. And you may also be able to deduct the interest on both loans at tax time.
Final Thoughts on PMI
Ultimately, though, many buyers find that they have to pay for PMI or private mortgage insurance because they can’t afford to put 20% down and can’t qualify for a second loan to cover the 20% down payment. But PMI may be worth it for them, especially if they are first-time buyers. They can become homeowners and may be able to deduct the cost of PMI if they meet the income-limitation requirements.
Professional Hudson Assistance
Keep in mind that whether you’ll have to pay for PMI depends largely on the price of the home you buy. With a lower-priced home, you may be able to afford a 20% down payment and thus avoid PMI. And that’s why it’s so critical to have an experienced Hudson agent in your corner. A good agent can help you get the best deal on a home and thus possibly avoid PMI.
If you plan to buy a home and have concerns about PMI, be sure to contact us at (440) 628-1321 .
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