What Is PMI?
PMI is Private Mortgage Insurance and it becomes a part of your monthly mortgage payment. And if you are not careful, it stays there way to long.
When you are looking to buy a home and you start searching for a mortgage, know ahead of time what you are getting yourself into. Let your Springfield Realtor tell about PMI and how it will affect your mortgage. This probably won't be news to 2nd or 3rd time buyers, but will be another blow to the pocket book of the first time home buyers out there.
What does PMI do?
First things first, now that you know what PMI stands for, I will unpack what it means. In order to do this, let's talk about something we are familiar with. Car Insurance. If you own a car then you have an insurance policy that covers you in case the car is damaged or totaled. The policy is your security. Banks do the same thing. You better bet your bottom dollar that the bank covers itself against any risk, and I will give you one guess who pays for that coverage.
PMI is the bank's insurance policy in case you default on your loan and they have to take the house back. When they loan you money, there is a risk that you will be unable to pay it all back, which puts them at a loss. PMI saves them. Make sense?
How much is a PMI payment?
So here's the deal, the ballpark PMI per month is $60-$70 for every $100,000 loaned. Putting it to numbers a $100,000 mortgage will be somewhere close to $65 PMI /month. $200,000 loan will pay $140 PMI / month. This is not exact and please know many factors go into the final number, but with these formulas, we can still be knowledgeable consumers.
WHAT MAKES UP A MORTGAGE PAYMENT?
- Principle (the actual loan amount)
- Property Taxes
- Homeowners Insurance
You will pay the same monthly amount for PMI until your loan to value is 78/22. This is where you really need to pay attention. In many cases the PMI drops off after you hit that 22% mark, however, you can call the bank and request it to be removed when you hit the 20% mark. Recap - you have to pay PMI until you own 20% of your home, but the bank will continue to collect, unless otherwise told, until you own 22% of your home. Is this sinking in? Save yourself some money and make sure you look at the amortization chart (here is one I like to use - HERE)
Here comes the knowledge. Soak this up. When an Agent, such as myself, asks you; "What type of financing do you have?' The answer will typically be, VA, Conventional or FHA. These are all very different. We will not talk about why they are different today, but trust me, they are.
VA is for military. VA has no PMI. Did you get that, NO PMI. That can be a very big deal!!
Conventional follows the PMI standards mentioned the paragraph above.
FHA. WARNING. WARNING. Some or all FHA has PMI FOREVER and EVER and EVER and EVER and EVER....It never goes away. Can you calculate how many THOUSANDS of dollars you will pay over the life of the loan? Yikes!!!
That may not be a big deal, if you know you will be moving in 3-5 years or if you will refinance in the future. That's ok. Again - just know ahead of time what you're getting yourself into. Your Real Estate Agent in Springfield IL is trying to give you the facts upfront.
How do I avoid PMI?
Easy. If you can't go VA, then put 20% down on the home. Boom. Saved yourself a lot of money. Your Welcome.
Listen, you don't have to know everything about everything before you embark on the journey of buying a home. But, with the heart of a teacher, I'll make sure you know the lingo of the transaction enough to know what to ask.