If you’re looking to buy a home, you may have come across the term PMI (Private Mortgage Insurance). And you might be wondering why you would need to purchase a private insurance policy for your mortgage. As the local real estate experts in the Bay Area, Sequoia Real Estate is happy to answer your burning PMI questions.
Starting with…
What is PMI?
PMI (Private Mortgage Insurance) is insurance homeowners purchase to protect their lenders in cases where the lender puts up a large percentage of the home’s value.
This relates directly to the traditional 20% down payment rule of thumb. For decades, home buyers were expected to put at least 20% down. But, as home values grew faster than incomes, 20% became unrealistic for most buyers (especially first-time buyers). Lenders were happy to loan more money so that homeowners could have lower down payments, but lenders were afraid to take on the additional risk. What if they loaned 95%, and then the buyer defaulted on their mortgage? This would put lenders in a vulnerable position.
So the industry created PMI. Buyers can pay a monthly insurance premium to protect the lender’s investment in the home if the buyer defaults on the mortgage.
Who Needs PMI?
In general, any buyer who puts down less than 20% of the purchase price will need some form of PMI.
One notable exception is buyers with VA loans. VA loans are reserved for military service members, veterans, and their spouses, and they are backed by the Department of Veteran’s Affairs, which offers additional protection for the lender. VA loan recipients can put down 0% and still avoid PMI!
Will I Be Stuck With PMI Forever?
How long your PMI stays with you depends on your loan type.
For conventional loans, you can request the removal of your PMI once you have enough equity built up. Usually, once the loan amount drops to 78% of the home’s value, you can get the PMI removed.
FHA loans, on the other hand, require ongoing PMI payments. The only way to remove your FHA PMI is to refinance your mortgage once you have enough equity in the home to avoid PMI.
USDA loans don’t technically charge a PMI, but they charge an upfront fee plus annual fees that serve the same purpose as PMI. These fees are required for the lifetime of the loan. But if you refinance to a different loan type once you have enough equity, you can avoid PMI on your refinanced mortgage.
Are You Ready to Buy a Home?
We understand how overwhelming the home buying process can be. Not only do you want to choose the right home in the right neighborhood, but you also need to choose the right financing to make the most of your purchase.
At Sequoia Real Estate, we help you with every stage of the buying process. With our connections in the mortgage industry, we can put you in touch with a mortgage broker who can help you understand your options and choose the loan type that serves you best. Then we’ll use our local market knowledge to help you get the best deal possible on a home that will suit you. Contact the experts here at Sequoia Real Estate today for a friendly, no-obligation consultation.