Finance

Understanding Private Mortgage Insurance (PMI)

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Each industry is unique and therefore has a library of acronyms and jargon. This is true for the mortgage industry too. While this is the case, learning more about some of the most common terms used can reduce this industry’s mystery and challenge.

Keep reading to learn more about private mortgage insurance or PMI. Finding out what this is and why it is important is an essential part of the homebuying process.

What Is PMI?

PMI is common insurance that is needed for FHA, conventional, and other loan types. Usually, PMI is needed if a buyer cannot make a down payment of at least 20%. Keep in mind that PMI insurance is not designed to protect the buyer. Instead, it protects the lender if a buyer discontinues their payments on the mortgage.

Who Covers the Cost of PMI?

PMI is coverage that is paid by a buyer or the lender, based on the mortgage insurance premium that is selected. Paying the premium monthly is the most common option. This will be included in the mortgage payment that is made.

The good news is that PMI is not considered a hidden fee. This means that most buyers will not experience any shellshock from it. For buyers who cannot make a down payment of at least 20%, the PMI is determined in the estimations for their mortgage payments. In some situations, a buyer will make upfront and one-time payments for the PMI. The PMI specifics will change based on the type of loan that is chosen. It is a good idea to speak to a loan originator about this. Learning more about Dustin Dimisa and his view on PMI can also help.

What Happens After Purchasing PMI?

Sometimes, people may understand they have PMI, but they forget that it is a part of their monthly mortgage payment. Be sure to take note and create an event on a calendar when the 20% home equity point is reached. This is when the mortgage company should drop the PMI fee from the bill. If someone finds they have some additional cash for any purpose, consider if it would make sense to pay more off the mortgage. For example, if someone is close to 20%, the extra money can be used to reduce the principal balance and to avoid paying the PMI coverage in the future.

The 20% equity threshold calculation for removing the PMI coverage can be based on the initial value of the property when closing or on the current value of the home. If the current calculation value is wanted, be sure to work with the lender to figure out the valuation method to use. This could require the use of an independent appraisal, which would be paid for by the homeowner.

Now that a person understands how PMI works, they have a better idea of why it is so important. Being informed is the best way to ensure this coverage is received and that a homeowner knows what to expect when paying it.

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