Private mortgage insurance (PMI) is basically an insurance policy taken out by your lender to insure them against your home going into foreclosure and you defaulting on the loan. If your loan is for 80% of the actual home value or less, lenders do not require PMI because they feel comfortable that if you still defaulted on the loan, they would be able to sell it at a high enough value to recover their investment. If you purchase or refinance and have less than 20% equity in the home, PMI is required on all conventional loans. The rates for PMI vary depending on your credit score, the amount of coverage needed, the length of the loan, and the insurance carrier.
Does PMI ever go away?
Technically, yes. Once the principal balance of your loan reaches 78%, PMI automatically drops off. The problem with this is that it only uses your principal payment and does not take into consideration any rising market conditions in your area that affect your equity. For this reason, most consumers refinance when they feel both their payments and a rising market allow them to reach the 20% plateau.
So, I must have PMI when I put down less than 20%?
Yes and No!
All lenders require PMI unless you have the required 20% equity in the transaction. However, Rotella Mortgage has many lenders that offer to pay the PMI for you with a slight rate increase. This is our Lender Paid Mortgage Insurance (LPMI) program. In almost EVERY instance, this is a much better deal for the borrower! See the example below on a $200,000 purchase with a 5% down payment.
Scenario #1 – PMI – Principal & Interest - $977 + PMI - $59 = $1036 Total Payment (4.625% rate)
Scenario #2 – LPMI – Principal & Interest - $1005 + $0 = $1005 Total Payment (4.875% rate)
You can see that even though the rate is slightly higher in our LPMI scenario, the payment is $31 less per month. This saves our borrower over $370 annually on their payments! This is why it is so important to look at ALL aspects of your loan details, and not just the interest rate!
For questions about PMI or any mortgage programs, call Rotella Mortgage – 402-339-4426.
Rotella Mortgage is an equal opportunity housing lender