The Three Types Of PMI Coverage
As a homeowner, you have options for how you pay the private mortgage insurance required. One option is known as “single premium,” in which you make a lump-sum payment at the time of closing. This covers your PMI policy for as long as your mortgage is active.
A second option is “lender-paid mortgage insurance” (LPMI) which requires no monthly payment whatsoever, but for which your mortgage rate will be raised to offset the lender’s additional risk. The third option is “monthly premiums,” which is the most common method by which homeowners pay PMI. The annual cost of insurance is split into 12 parts, and collected with each month’s mortgage payment. Each of the option has its merits.
Homeowners who plan to keep their current loan and expect home values to moderate or remain flat may prefer the single premium option, which may limit long-term costs. By contrast, homeowners who intend to move or refinance within the first few years of the loan may prefer lender-paid MI, which raises the mortgage rate by a small amount, but which requires no separate payment. For everyone, monthly premiums are likely the best fit. Payments are regular, then cancel out as the loan pays down over time and as the home increases in value.
How To Cancel Your PMI Coverage
Private mortgage insurance gets a bad rap. Buyers have called it “a waste of money,” and worse. “I shouldn’t buy a home if I can’t afford 20%,” they will sometimes say. But private mortgage insurance serves a purpose. PMI lets a buyer purchase a home with less than 20% down. The cash not used for downpayment can be used to finance home improvements, to keep an emergency fund invested with a bank, or for any other purpose. Access to PMI also lowers barriers-to- entry for first-time home buyers.
Currently, the median U.S. sale price is near $250,000, Without access to PMI, a home buyer would need to make a $50,000 down payment in order to purchase a home via a conventional loan. With access to PMI, the home buyer’s downpayment can shrink to $7,500. PMI adds to your monthly payment, but that’s okay. Many home buyers can afford the monthly mortgage insurance premiums. It’s coming up with a down payment that keeps them from buying a home. PMI is the price you pay for the ability to put down less than 20%. Even better, private mortgage insurance is impermanent. As a homeowner, once you can show that your home’s equity position has reached twenty percent, you reserve the right to ask your lender to have your PMI removed. In many cases, your PMI payments can be canceled immediately.
There are two ways by which your home equity can reach the required levels for PMI cancelation.
1. Your loan balance is paid down to 78% of the home’s original purchase price. This happens with regular monthly payments to your lender, eventually.
2. Request a home appraisal from your lender which shows 20% home equity Lenders are required by law to cancel private mortgage insurance once either of the above options can be proved. However, consumers can be pro-active about canceling PMI, too. Home values are rising nationwide and homeowners have seen their home equity levels rise, in turn. Meanwhile, as home values have climbed, mortgage rates have been dropping. This creates an excellent opportunity to refinance. There are an estimated 6.5 million U.S homeowners currently eligible to refinance their home loans, and many of these homeowners currently pay private mortgage insurance. A new loan, which would require a new appraisal, may show the requisite 20% home equity required to ditch the PMI. In this way, homeowners can refinance their PMI away.