Do you have PMI or private mortgage insurance? Do you know if you even have it on your mortgage? Even so, what can you do if you are paying PMI? Let’s break it down.
PMI is arranged by the lender and provided by private insurance companies. PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also usually required.
That is the clinical side. What is the practical side to you, the homeowner? What is the cost of PMI? PMI typically costs between 0.5% to 1% of the entire loan amount on an annual basis. That means you could pay as much as $1,000 a year—or $83.33 per month—on a $100,000 loan, assuming a 1% PMI fee. Use that same $83.33 per every one hundred thousand you borrowed! That is a huge amount of money.
Example: $300,000 = $250.00 a month. That goes to nothing. No equity, no balance reduction. Nothing. This was the cost of doing business!
Private Mortgage Insurance
Now that you understand it better, how do you get rid of it? In most cases, you must be at an 80% LTV with your current lender. On the surface you may say, well I have only had my mortgage for two years, and all the payments basically go to interest. While that is true, you forget one key factor:
Market appreciation. Although it may not seem like it if you watch the news, the real estate market is hot. When it is a sellers market (meaning less inventory available), prices move up. For every home that’s comparable to yours and sells in your neighborhood or area, it drives up the value of your home.
Now you may say “How does this help me, I don’t want to sell!” Nor should you. However, by doing a refinance you can take advantage of lower rates, and YES in many cases you will be able to lose that PMI forever.
Imagine, refinancing right now, and saving $400 or $500 a month due to losing PMI and a lower rate? Many people are not getting a $6,000 net raise in their job. You can. That is significant and real.
Now we know some of you out there are saying “I took the mortgage that didn’t have PMI.” Great, that was offset by the lender at a higher rate. So if you choose to refinance, although you are not having to eliminate PMI, guess what? You are saving monthly in payment and overall on cost.
Your house doesn’t need two insurance policies. One is homeowners insurance that protects you. One is far more expensive and protects the bank. Let’s take back the money in your monthly mortgage and put it to work for you!