What is Private Mortgage Insurance?
Private mortgage insurance (PMI) is a type of insurance that a borrower might be required to buy as a condition of a conventional mortgage loan. Most Approval Departments require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price or when you are refinancing a loan with less than 20% equity.
When a borrower makes a down payment of less than 20% of the property’s value, the mortgage’s loan-to-value (LTV) ratio is over 80% (the higher the LTV ratio, the higher the risk profile of the mortgage for the lender).
Unlike most types of insurance, the policy protects the lender’s investment in the home, not the individual purchasing the insurance (the borrower). However, PMI makes it possible for some people to become homeowners sooner. For individuals who elect to put down between 3% to 19.99% of the residence’s cost, PMI allows them the possibility of obtaining financing.
Borrower-Paid Mortgage Insurance
The most common type of PMI is borrower-paid mortgage insurance (BPMI).
BPMI comes in the form of an additional monthly fee that you pay along with your mortgage payment. After your loan closes, you pay BPMI every month until you have 22% equity in your home (based on the original purchase price). At that point, the lender must automatically cancel BPMI, as long as you’re current and up-to-date on your mortgage payments.
Some loan servicers may permit borrowers to cancel PMI sooner based on the home value appreciation. Suppose the borrower accumulates 25% equity due to appreciation in years two through five, or 20% equity after year five – in that case, the investor who purchased the loan may allow PMI cancellation after the home’s increased value is proven. That can be done with an appraisal, a broker’s price opinion (BPO), or an automated valuation model (AVM).
Lender-Paid Mortgage Insurance
With lender-paid mortgage insurance (LPMI), your lender will technically pay the mortgage insurance premium. In fact, you will actually pay for it over the life of the loan in the form of a slightly higher interest rate. Unlike BPMI, you can’t cancel LPMI when your equity reaches 78% because it is built into the loan. Refinancing will be the only way to lower your monthly payment. Your interest rate will not decrease once you have 20% or 22% equity. It’s important to note that lender-paid PMI is not refundable.
The benefit of lender-paid PMI, despite the higher interest rate, is that your monthly payment could still be lower than making monthly PMI payments. That way, you could qualify to borrow more.
Not sure which is right for you? Contact our Blink team to go over the numbers, and what’s most important to you. We work with Houston clients on various levels and are happy to run the numbers to see what your best option is.
