What is PMI & How to Avoid It?

Buying a house is quite possibly the largest investment that most people will ever make. And when you consider that the median price of a new home in the US has been around $320,000 since 2018, the thought of actually hitting that milestone may seem out of reach for some.

It can also be one of the most confusing, especially for first-timers. Homebuyers attempt to master a whole slew of new vocabulary terms, from “contingencies” to “escrow” to “fixed versus adjustable rate mortgages.” Another one of the mystifying terms is PMI.

What is PMI?

PMI stands for “private mortgage insurance.” When you hear “insurance,” you may think it’s there to protect you in case something goes wrong with your home loan.

Actually, PMI is there to protect the lender that’s likely offering you a conventional mortgage, whether it be a refinance or a purchase loan. In other words, PMI is mortgage insurance for the lender, not for you.

If you are qualified for a home loan and are putting less than 20% down, you may be required to pay for PMI.

PMI is insurance on your mortgage that the lender requires you to purchase in order to protect them if you default on the loan.

It will help them recoup their losses if, for some reason, you can’t make your mortgage payments and go into default on the home loan.

When a lender is considering whether to extend a mortgage loan, and on what terms, they look at something called the loan-to-value ratio, or LTV. This is equal to the mortgage balance divided by the value of the property.

The more money you have for a down payment, the less you need to take out a loan for, and therefore the lower your LTV ratio. Whether you’re buying a home or refinancing, the higher your LTV ratio, the more of a gamble you’re likely to appear to lenders.

And they’ll usually want you to have PMI when your LTV is less than 80%, which is what happens when you put less than 20% down.

Don’t confuse this with homeowner’s insurance, which covers your home and belongings in the event of an emergency or accident, or mortgage protection insurance which helps pay for your mortgage in the event of a job loss or death.

PMI Requirements

Private mortgage insurance is usually required when there is less than a 20% down payment. These loans present a slightly higher risk to the lender – who wants to insure their investment. In general, if you put down less than 20% on your mortgage, then you will likely have to pay PMI on your mortgage.

The upside of mortgage insurance is that paying insurance on your loan can make you eligible for a loan you might not otherwise qualify for, and can allow you to purchase a home even if you don’t have a 20% down payment.

Private mortgage insurance has been around for more than 60 years . Over that time period, more than 30 million families, including 1 million in 2018, relied on PMI in order to buy or refinance a mortgage. A significant amount of those who did were low-income or buying their first homes.

How much does Private Mortgage Insurance Cost?

How much your private mortgage insurance costs depends on the type of mortgage you get, how much your down payment is, your credit score, type of property, type of transaction, and the level of PMI coverage required by your lender. The cost of your PMI is often included in your monthly payments.

If you’d prefer it weren’t part of your monthly payments, you could also pay an upfront premium when closing on your home. This means that you could buy out your mortgage insurance for the life of the loan by paying the full premium upfront as part of the closing costs. You may also choose a combination of both upfront and monthly payments.

PMI generally costs between 0.58%-1.86% of the mortgage amount annually, but premium costs can vary depending upon the loan scenario.

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How to Pay PMI

There are a few different options for paying PMI, which depend on your preferences. Many borrowers pay PMI as a monthly premium that is added on to the mortgage payment. You can see what the premium is in both the loan estimate you get when you apply for the mortgage and again in your closing disclosure.

The PMI factor can change between these two estimates because the appraisal valuation which drives the final LTV (loan to value) may be received by the lender after the Loan Estimate is generated.

Another option is to pay your PMI all at once in a single sum when you close on the house. Or you can ask the lender if they can cover some or all of the PMI cost through lender rebate money.

Generally, in this scenario a borrower accepts a higher rate and the rebate money in that higher rate comes back to the borrower as a credit and the borrower can use that lender credit to cover some or all of the PMI cost.

Ask a lender to generate a quote with different PMI payment options so you can compare and choose the best plan for your budget.

Keep in mind that some PMI policies are refundable and some are non-refundable. A third scenario is to pay some of the PMI up front and get the rest added on to your mortgage payment each month.

If you’re confused about the different policies and payment options, ask the lender’s representative to explain the options to you and ask for a quote on how much you will owe in different scenarios.

If you are purchasing a home, you may be receiving a seller credit towards your closing costs, and this can be another way to cover the PMI in one lump sum and not have ongoing monthly payments.

How to Get Rid of PMI

For a principal residence or second home, the borrower can initiate cancellation of PMI under the following scenario: The LTV ratio must be:

• 75% or less, if the seasoning of the mortgage loan is between two and five years.
• 80% or less, if the seasoning of the mortgage loan is greater than five years.

The “seasoning” of a mortgage loan is the number of years the borrower has made payments and is considered as being in good standing. If Fannie Mae’s minimum two-year seasoning requirement is waived because the property improvements made by the borrower increased the property value, the LTV ratio must be 80% or less.
For automatic termination of PMI the guidelines are:
• A single-family, principal residence or second home that is security for a mortgage loan closed on or after July 29, 1999.
• The borrower is current on their mortgage payments as of the applicable PMI termination date.

The applicable termination date is:
• the date the principal balance of the mortgage loan reaches 78% of the LTV ratio, or
• the first day of the month following the midpoint of the mortgage loan amortization period, if the scheduled LTV ratio for the mortgage loan does not reach 78% before then.

Your lender is required to tell you how long it’ll take to pay down your mortgage enough to qualify for PMI cancellation. You will see this information in your loan packet as a disclosure. They also must give you information every year about how to cancel your PMI.

When PMI Is not Required

Borrowers will generally need to have more than 20% equity in their home to not be required to have PMI.

The Homeowners Protection Act was put into place to protect consumers from paying more PMI than they are required to. Specifically for residential mortgages closed on or after July 29, 1999, the Act covers two scenarios: automatic PMI termination and borrower-initiated termination.

Automatic PMI termination is effective when the principal balance of the loan reaches 78% of the LTV ratio of the original property value. If that percentage of LTV ratio is not reached by the midpoint of the mortgage amortization period, the PMI is automatically terminated at that midpoint.

The borrower can initiate cancellation of PMI when the balance of the mortgage loan reaches 80% of the LTV ratio of the original property value. By keeping track of when this percentage will be reached, the borrower may be able to save some money.

If the current value of your home has increased through market appreciation and/or qualified home improvements, then you may have more equity in the property and owe less than 80% of it’s worth, which could qualify you to cancel PMI on your mortgage earlier than anticipated.

The original value of a home is determined by the original appraised value or purchase price of the home, whichever is less.

You will need to work with your lender to see if you are eligible and what is required to approve your request.

Or you could refinance your home loan, effectively creating a new mortgage in which you have a greater share of equity.

One caveat is that FHA loans, which have their own benefits, carry with them a government mortgage insurance called Mortgage Insurance Premium (MIP), which in most cases is applied for the life of the loan. The only way to cancel it is to refinance your FHA loan into a conventional loan without PMI or MIP.

Additionally, military personnel who are eligible to apply for a VA loan do not get charged PMI. VA loans never charge private or government mortgage insurance even for borrowers who don’t put 20% down.

Another potential option to avoid PMI is to utilize an 80/10/10 mortgage. These mortgages (or piggyback loans) are generally used by homeowners who don’t have 20% to put down on their down payment.

You’ll take out two loans at the same time, one for 80% of a home’s value, and the other to cover the amount you don’t have to get up to 20% down after your down payment is applied (usually 10%). Piggyback loans are also called a second trust deed loan.

One last option you have to avoid PMI is the Lender-Paid Mortgage Insurance (LPMI) option. With this option, your lender will cover the cost of the PMI, likely in exchange for a higher interest rate on your mortgage loan.

As you can see, there are many different options you have if you don’t want to be required to pay PMI. The easiest is to put 20% down on your loan, but if you are unable to do so there are a few workarounds. Now that you are familiar in the world of PMI, you can continue your search for mortgage loans.

While you are researching it is worth checking out SoFi. With SoFi, you can make your dream home a reality with competitive rates, no hidden fees, and as little as 10% down.

 


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9 Smart Ways to Pay Off Student Loans

No one ever wants to talk about the unglamorous work that goes on behind the scenes, but it’s the unspoken progress that makes or breaks every successful business owner, athlete, or creative person. It is helpful to have this mindset and to think about student loan repayment like any other big feat worth accomplishing.

It begins in knowing that paying down student loans in a way that is financially smart and effective for you can take time and effort, much of which lies in the preparation—the proper planning, budgeting, and education can go a long way to make tackling your student loans during the next decade or more so much easier.

While there is no one single smartest way to pay off student loans, there are steps that you can take that can help put you in a great position to pay off your student loans on a timeline and with terms that work for you. In addition to understanding your student loans, your goals can also include building an overall financial plan that includes your loans.

9 Ways to Pay Off Student Loans

If you want to understand how to repay student loans in the smartest and most financially responsible way possible for you, here are nine steps to consider including in your student loan repayment plan.

1. Organizing All Of Your Sources Of Debt—Including Student Loans

Keeping track of all of your student loans and other sources of debt can be tricky, especially if you are a recent graduate. A first step to consider is to organize them in a list.

On your list, you could include the loan service provider (bank, federal government, or private lender), amount of the loan, monthly payment, interest rate, and when the loan should be paid in full.

If you aren’t sure what your monthly payments on your student loans will be, you can use our student loan calculator to get a rough idea—or you can call your loan servicer(s).

If you have credit card debt or other personal loans, include these on your debts list. With all of your sources of debt, you can then mark on a calendar the date that the monthly payments are due.

While you always need to make the monthly minimum payments on all debts (unless your student loans are within their grace period or are in forbearance), listing them out allows you to identify which debts you may want to pay off first.

If you have high interest credit cards adding up each month, a credit card consolidation loan may be a great option to look at, too.

Once your credit cards are paid off, you’ll want to think about whether your goal is to pay your loans off quickly, or to simply make the monthly payments until the loans are done. The former is one way to save on interest over time.
Some folks do prefer to pay only the minimum monthly amount on their student loans so that they can save a little while they pay down their student loans.

2. Budgeting To Include Loan Payments

No matter who you are, learning how to budget your money is a good thing to have on the top of your financial to-do list. It can take time and effort to develop a budgeting system that works for you, but it is doable, and totally worth it. To get started, track your monthly cash inflows and outflows for two months.

Total up how much money you spent in each category, including debt payments like student loans.

Once you have a general idea of what you’re spending in each category, you can begin to build a budget framework. For example, if you spend $260 on groceries one month and $300 the next, you can now set yourself a realistic grocery budget. Leave room for annual, bi-annual, and quarterly expenses, as well as incidentals.

With a budget that is built to include student loan payments, you’ll be more equipped to make all of your payments on-time and know how much is available to spend on other needs and wants. Also, understanding exactly how you’re spending allows you to identify the areas where you’re overspending.

For example, a close look at your budget could reveal that you’re spending more than you realized on dining out, subscriptions, clothing, or even rent—and gives you the power to make a change. And by saving money in other categories, you can free up money to apply to your financial goals.

3. Setting Up Automatic Payments

Hopefully, your student loans are already set up to be automatically deducted from your bank account. (This is a good strategy for all your monthly bills.) If they aren’t, you can contact your student loan servicer to set it up. This way, you won’t miss a payment because you forgot or are somewhere where you can’t access the internet.

Remember, if you miss or are late on a payment, it can negatively impact your credit score. Bad credit could preclude you from opportunities in the future, such as being able to refinance your loan to a lower interest rate. Take every extra precaution to make sure your loans get paid on time.

As an added bonus, some service providers offer a discount if you arrange to pay by automatic payments. When you sign up, be sure to ask if such a discount is available.

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4. Paying More Than The Minimum Monthly Amount

Most student loan servicers allow you to pay more than the minimum monthly payment, and doing so can be a great strategy if your goal is to pay back your loan faster than the stated term. In addition to a faster payoff, you can save on interest over the life of the loan by paying it off sooner. Even small amounts can make a difference.

To do this, you can call your loan service provider to adjust your automated monthly payment to a higher amount, and clarify that you want that extra money dedicated to the principal of the loan.

Make sure, after the next month’s payment, that the money was indeed put towards the loan’s principal. Looking for more ideas on paying down your student loans? SoFi’s student loan help center offers tips, guides, and resources on all things student loans.

5. Putting Additional Income Towards Student Loans

Increasing your monthly payment isn’t the only way to put a dent in your loans; at any point, you are allowed to make a lump sum payment towards the principal of your loan. This is a great way to speed up the student loan repayment process without having to commit to paying more each and every month.

You may have more opportunities to do this than you think: You could utilize your tax refund, holiday or birthday money, work bonuses or inheritance money.

Additionally, putting income from a side hustle or other passive income towards student loans could be a financially rewarding move over the long-term.

6. Adjusting Your Repayment Plan If Needed

Most federal student loans come with a standard, ten-year repayment plan—unless you chose otherwise. With federal loans, there are other options for repayment plans with lower monthly payments, calculated using discretionary income and family size. These plans can lower your monthly payments by extending the length of your loan, usually from ten years to twenty or more years.

If you choose one of these options, it is important to know that even though your monthly payments are lower, you can end up paying more in interest over time (longer loan terms mean more interest payments, after all).

Therefore, it’s not a great choice if you want to pay off your loans quickly or pay as little in interest as possible, but it is available to those who are having trouble making their monthly payments.

If you are planning to utilize the Public Student Loan Forgiveness (PSLF) program for your federal student loans, you will need to select one of the income-driven repayment programs.

7. Considering Refinancing Your Loans

When you refinance a loan or multiple loans, a private lender pays off your current loan(s) and provides you with a new loan, ideally at a lower rate. A lower interest rate could mean savings over the life of your loan.

Though student loan refinancing might not be the right option for everyone, it’s a strategy that student loan holders may want to research and consider.

Also, understand that while refinancing can consolidate multiple student loans, both federal and private in many cases, federal loan consolidation is a totally different process. With federal student loan consolidation, the government bundles your loans together into one, using a weighted average of the interest rates, rounded up to the nearest eighth of a percent.

If you’re considering refinancing with a private lender, however, you may want to ask yourself whether the purpose is to lower your monthly payment but keep the same term, freeing up some money in your monthly budget, or to increase your monthly payment at a lower interest rate, by shortening your term, so that you can pay off your student loans faster.

It’s important to note here that refinancing your federal student loans with a private lender means you give up the benefits and protections offered by the federal government, like the income-driven repayment plans mentioned above, as well as PSLF and deferment or forbearance options.

Exploring refinancing with a private lender usually doesn’t take a lot of time and it usually doesn’t cost you anything. For example, you can get rate quotes from SoFi in just a few minutes, and even talk to a representative who can walk you through the process.

8. Knowing Your Worth And Asking For A Raise

With all raises, you can use the extra income towards your financial goals. This could mean increasing the monthly amount you pay towards your student loans, or making the occasional lump sum payment with the extra windfall, and/or saving money for other long-term financial goals.

How much money you earn is an important factor contributing to your financial stability and ability to pay down your student debt. While budgeting is important, so is knowing your worth and asking for more when you deserve it.

If you haven’t already, start keeping track of your successes now so that at your next compensation conversation, you’re loaded with concrete data on why you deserve a bump.

9. Understanding Your Employment Benefits Packages

Although not yet as widespread as retirement or healthcare benefits, more employers are offering student loan repayment help as a benefit to attract and retain employees.

Depending on your personal situation, student loan repayment help could be as important as a raise or other benefits.
Whenever you’re comparing job offers, it’s critical to understand and compare benefits packages, because although they’re not flashy like a big salary or company equity, benefits can be just as valuable.

If you’re looking for a new job, you could include student loan repayment help in your search. While it obviously shouldn’t be your only consideration, it’s great to have an idea of what you’re looking for in an employer.

Ready to see if you can save money by refinancing your student loans? Check your rates in as little as two minutes.



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IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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The Difference Between Secured vs Unsecured Debt

Debts fall into two broad categories: secured debt and unsecured debt. Stop paying one and in addition to credit issues and loan collectors, you could also lose a major asset, like your house or car.

Stop paying the other and you could ruin your credit and debt collectors could come a-knocking. It’s crucial to know the difference between the two—and what’s at stake—before taking on either kind of debt.

What is Secured Debt?

Secured debts are backed, or secured, by an asset, such as your house. This asset acts as collateral for the debt, and your lender is what is known as the lien holder. If you default on a secured debt, the lien gives your lender the right to seize the asset and sell it to settle your debt.

Mortgages and auto loans are two common types of secured debt. A mortgage loan is secured by the house, and an auto loan is secured by the vehicle. You may also encounter title loans, which allow you to use the title of your vehicle to secure other loans once you own a car outright.

What Are the Possible Benefits of Secured Loans?

Because lenders can seize an asset to pay off the debt, secured loans are considered less risky for the lender than unsecured loans. “Low risk” for a lender can translate into benefits for borrowers. Secured loans generally offer better financing terms such as lower interest rates.

Secured loans may also offer some easier qualifying criteria. For example, secured loans may have less stringent requirements for credit score vs unsecured loans, which generally rely more on the actual credit and income profile of the customer.

What Are the Stakes?

The stakes for borrowers can be pretty high for secured loans. Consider that if you stop paying these debts (timeframes for secured loan default can vary depending upon the type of secured debt and lender terms), the bank can seize the secured asset, which might be the house you live in or the car you need to drive your kids to school or yourself to work.

Failing to pay your debt, or even paying it late, can possibly have a negative effect on your credit score and your ability to secure future credit, at least in the shorter term.

What is Unsecured Debt?

Unsecured debt is not backed up by collateral. Lenders do not generally have the right to seize your assets to pay off unsecured debt. Examples of unsecured debt include credit cards, student loans, and some personal loans.

What Are Some Benefits of Unsecured Loans?

Unsecured loans can be less risky for borrowers because failing to pay them off does not result in your lender seizing important assets.

Unsecured loans often offer some flexibility, while secured loans can require that you use the money you borrow for very specific purposes, like buying a house or a car. With the exception of student loans, unsecured debt often allows you to use the money you borrow at your discretion.

You can buy whatever you want on a credit card, and you can use personal loans for almost any personal expense, including home renovations, buying a boat, or even paying off other debts.

What Are the Stakes?

Though unsecured loans are less risky in some ways for borrowers, they are more risky for lenders. As a result, unsecured loans typically carry higher interest rates in comparison.

Even though these loans aren’t backed by an asset, missing payments can still have some pretty serious ramifications.

First, as with secured loans, missed payments can negatively impact your credit score. A delinquent or default credit reporting can make it harder to secure additional loans, at least in the near future.

Not only that but if a borrower fails to pay off the unsecured debt, the lender may hire a collections agency to help them recover it. The collections agency may hound the borrower until arrangements to pay are made.

If that doesn’t work, the lender can take the borrower to court and ask to have wages garnished or, in some extreme cases, may even put a lien on an asset until the debt is paid off.

Managing Secured and Unsecured Debt

Knowing whether a loan is secured or unsecured is one tool to help you figure out how to prioritize paying off your debt. If you’ve got some extra cash and want to make additional payments, there are a number of strategies for paying down your debt.

You might consider prioritizing your unsecured debt. The relatively higher interest typically associated with these debts can make them harder to pay off and could end up costing you more money in the long run.

In this case, you might consider a budgeting strategy like the “avalanche method” to tackle your debts, whereby you’d direct extra payments toward your highest interest rate debt first.

(Be sure you have enough money to make at least minimum payments on all your debts before you start making extra payments on any one debt, of course.)

You can also manage your high-interest debt by consolidating it under one personal loan. A personal loan can be used to pay off many other debts, leaving the borrower with only one loan—ideally at a lower interest rate. Shop around at different lenders for the best rate and terms you can find.

Be cautious of personal loans that offer extended repayment terms. These loans lengthen the period of time over which you pay off your loan and may seem attractive through lower monthly payment options, but choosing a longer term likely means you’ll end up paying more in interest over time.

What’s Right for You?

Everyone’s financial situation is different, so what works for one person may not work for another. If you’re interested in an unsecured personal loan, consider SoFi.

With competitive interest rates and flexible options for a fixed monthly payment, you can explore options to consolidate credit cards and/or other high-interest debt or make a major purchase. It only takes minutes to check your rates.

Learn more about how personal loans can help you manage your debt with low interest rates and no fees.


Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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