What Is Private Mortgage Insurance (PMI)?
Private mortgage insurance, or PMI, is a type of insurance for your mortgage. If you put down less than 20% on your home when you buy it, you’ll most likely be required to purchase PMI. Although you’re paying for the PMI, it protects the bank, not you, in case you can’t make the mortgage payments on your home.
Why Is This Important?
PMI is usually more expensive the smaller your down payment and the longer your loan terms. For example, if you put very little down on your home and have a 30-year mortgage, your PMI is going to be much more expensive.
How to Remove PMI
Once you have PMI, it’s difficult to remove. Most mortgages require at least 2 years of payment and an LTV ratio below 80%. Once you meet these criteria, you can ask your bank to take off the PMI. Even then, it’s not easy and may require a lot of work on your part to convince the bank to remove the PMI. However, it’s important to do so because PMI can cost up to $250 a month depending on the cost of your home and is money you could be saving or investing.
What Is Loan to Value Ratio (LTV)?
The loan to value (LTV) ratio is how much you owe on your mortgage in relation to the value of your home. You can reduce the ratio by paying off the loan, but it can also go down if the value of your house goes up. If your home value has increased, you’ll need an appraisal to prove that your LTV is now below 80%. However, some mortgages are strict and may require that you reach 80% LTV via payments rather than fluctuations on your home’s value in case the value decreases again.
If you aren’t able to put 20% down on your home, but you have good credit, you may be eligible for a 10-10-80 loan:
- 10% down payment
- 10% 2nd mortgage
- 80% 1st mortgage
The 2nd mortgage is often a home equity line of credit (HELOC), which has a variable rate that’s often higher than that of your 1st mortgage. You should pay off the 2nd mortgage as quickly as possible to avoid interest rates going up.
Why Is This Important?
If you get a 10-10-80 loan, you may be able to avoid PMI. PMI is calculated off of the 1st mortgage and if that’s only 80%, then you may not be required to get PMI. However, in order to qualify for a 10-10-80 loan you have to have strong credit and it may depend on current lending standards.
Manual Underwriting Process
What if you’re trying to buy a home but you don’t have established credit? It’s possible, but takes more work on your part. You’ll have to go through the manual underwriting process, but larger, well-known banks often won’t do that. Regional banks may be willing to, however, if you can show them that you can afford the mortgage payments, you have no debt, and that you have the money to put down on the house.
Buying a home is a big decision. It can affect your finances either positively or negatively for many years to come. These strategies can help you to both choose an affordable home and to avoid costly mistakes.
Stay tuned for the next blog in our homebuying series! Our next blog and video will cover how to use our Mortgage Affordability Calculator.
As always, if you have any questions, don’t hesitate to reach out! We’re here to serve. 407.210.3888
Important Disclosures: The information provided here is of a general nature and is not intended to answer any individual’s financial questions. Do not rely on information presented herein to address your individual financial concerns. Your receipt of information from this material does not create a client relationship and the financial privileges inherent therein. If you have a financial question, you should consult an experienced financial advisor. Moreover, the hiring of a financial advisor is an important decision that should not be based solely upon blogs, articles, or advertisements. Before you hire a financial advisor, you should request information about the financial advisor’s qualifications and experiences. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative (or “informational”) purposes only and not intended to be reflective of results you can expect to achieve. AllGen Financial Advisors, Inc. (AllGen) is an investment advisor registered with the SEC. AllGen does not provide personal financial advice via this material. The purpose of this material is limited to the dissemination of general information regarding the services offered by AllGen. The Disclosure Brochure, Form ADV Part II, which details business practices, services offered, and related fees of AllGen, is available upon request.