Private mortgage insurance: How can you avoid paying it?

Private mortgage insurance : Tips on how you can avoid paying it.

 

Home buyers who apply for mortgage loans are required to pay a down payment. This down payment should be of atleast 20% of the property’s appraised value or selling price. In case, a borrower is unable to make the minimum down payment of 20%, then the lender will ask for mortgage insurance. This is known as private mortgage insurance or PMI. It is called so because people may get confused over VA and FHA insurance that are owned by the government agencies.

Cost of PMI

 

Private mortgage insurance costs vary since it depends on the amount of down payments made by the mortgage borrowers and the total loan amount. Ideally, the cost of PMI is more or less 1-1/2 of 1% of the principal loan amount. Borrowers will have o pay the premiums of the PMI. However, the beneficiary will be the lenders.

 

The objective of this insurance is to safeguard the investments of the lenders. Through this insurance policy insurance companies will compensate the lenders in case of a borrower’s default to repay the loan. It is the lenders who choose their mortgage insurer, while their borrowers pay for the insurance coverage.

 

Who are required to buy the PMI?

 

Usually, people with a loan-to-value (LTV) ratio of less than 80% will not have to buy the PMI. On the other hand, borrowers who have low/poor credit score or pose higher risk to the lenders will be asked to buy the PMI.

 

Generally, borrowers with 70%, 60% and 50% as their LTV are also required to purchase the PMI. Home buyers whose properties have been recently foreclosed are considered as high risk borrowers. Moreover, property owners who are selling multiple homes within a short period of time are considered as risky too.

 

Ways to avoid buying the PMI

 

Mortgage borrowers who are compelled to buy the PMI can avoid doing so through the following ways:

 

Mortgage refinance – Borrowers should analyze their monthly savings before refinancing their mortgage loans. Moreover, they must weigh the offers of more than one lender, prior to opting for anyone. While considering refinance as an option, borrowers can ask for mortgage quotes for the remaining period of their loans. In addition to that, they should check the outstanding balance of their existing loan and calculate the break-even point. Borrowers who are asked to buy PMI for their current loan and not for refinancing their loan should opt for the latter.

 

Loan-to-Value Ratio – Borrowers with less than 80% of the threshold (LTV) or as per the stipulation of the lenders, are not required to buy a PMI. Usually, a good number of lenders observe until the LTV is 78%, however, they may not ask for PMI, on the borrower’s request. Lenders calculate the LTV of the borrowers on the basis of the actual loan origination cost. Hence, it is very important for the borrowers to keep a constant watch on their home’s market value.

 

In this case, borrowers can conduct a professional home appraisal, if they believe that their property’s value has increased. This can be provided to the lenders as a proof of their property’s increased market value and save themselves from buying the PMI.

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