Buying your first house is a big step and it can often feel overwhelming, but it doesn’t have to be. Since you most likely won’t be paying cash for your home purchase, you’ll need to take out a mortgage loan or home loan.
Because lenders want to make sure their loan to you is a safe bet, mortgages often come with their own requirements, like mortgage insurance. Around 50% of first-time homebuyers pay for mortgage insurance , of some kind, either private (PMI) or government insurance (MI-FHA), mainly because it makes them eligible for the home loan they need.
Making sure you understand some of the different mortgage requirements now will ensure you’re better prepared for the home-buying process.
Along with closing costs —which includes things like title insurance, mortgage application fees, lenders fees, and appraisal and inspector costs.
If you are qualified for a home loan and are putting less than 20% down, you may be required to pay for Private Mortgage Insurance (also known as 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.
PMI is mortgage insurance for the lender, not for you. 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.
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.
When Is Private Mortgage Insurance Required
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 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.
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.
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.
How Can You Avoid or Get Out of Paying PMI?
To avoid PMI mortgage, generally you’ll need to have more than 20% equity in your home. There are some Jumbo Non Conforming loan programs where the lender does not require PMI generally with 10% or more down payment. If you’re able to fit these examples when you buy your house, great! But if not, don’t worry. You can still get PMI removed from your mortgage loan later.
For example, under the Homeowner’s Protection Act , a mortgage loan closed on or after July 29, 1999 is eligible for automatic PMI termination based on, the date the principal balance of the loan is scheduled to reach 78% loan to value (LTV) of the original property value, or the first day of the month following the mid-point of the mortgage amortization if 78% LTV is not yet reached.
Additionally, there may be other routes you can take to remove PMI. Borrower initiated termination of PMI based on the date that the loan balance is scheduled to reach 80% LTV of the original value of the owner occupied property.
Or if the current value of your home has increased through market appreciation and/or qualified home improvements, then you may now owe less than 80% of what it’s worth, which could qualify you to cancel PMI on your mortgage.
Original value of home is defined as original appraised value or purchase price whichever is less. Borrower must be current on mortgage payments to be eligible.
You will need to work with your lender to see if you are eligible and what is required to approve your request.
Related: Thinking about making updates to your home? Use our Home Project Value Estimator to see what type of value you could get in return.
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, but carries a government mortgage insurance called Mortgage Insurance Premium aka 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, those 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 if you don’t put 20% down.
Another workaround 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 downpayment.
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. For more information on these types of loans you can read here .
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. SoFi offers LPMI on their Jumbo Non-Conforming loan program with as little as 10% down payment.
As you can see, there are many different options you have to avoid 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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