Help clients understand, “What is PMI?”
As a real estate professional, you know what private mortgage insurance (PMI) is. But many of your clients don’t — and you don’t want them to be surprised at closing when they see an extra cost added to their monthly mortgage payment. The talking points below can help you anticipate and answer frequently asked homebuyer questions about PMI from the start.
“Why do I need to pay PMI?”
PMI protects the mortgage lender in case a borrower defaults on the loan. If that happens, the insurance company makes a payout to the lender. This is different from homeowners insurance, which protects the homeowner against damages to their house and property.
“When is PMI required?”
Loans with lower down payments are considered riskier. So most lenders require that borrowers pay PMI when their down payment is less than 20 percent — or, put another way, when the loan-to-value (LTV) ratio is 80 percent or higher. At Third Federal, we don’t require PMI if the borrower puts at least 15 percent down (an LTV of 85 percent).
“What will it cost me?”
PMI premiums vary based on multiple factors, including your credit score, the loan size and the loan type. Generally, you can expect to pay about 0.3 to 1.5 percent of the original loan amount each year. However, the cost is typically broken down into a monthly amount that’s rolled into your mortgage payment.
Tip: PMI premiums may be tax deductible. Ask your tax advisor for details.
“Do I need it for the life of my mortgage?”
Not necessarily. If you have an FHA or VA mortgage, then PMI premiums do continue for the life of the loan. With other loan types, you can ask the lender (in writing) to cancel PMI once your mortgage balance equals 80 percent of the home’s purchase price. Once the balance reaches 78 percent of that original value, the lender is required to remove PMI automatically.
You may be able to remove PMI by refinancing if you’re able to prove that your home’s value has increased to the point where the LTV is less than 80 percent.
Call one of our dedicated mortgage specialists toll-free at 1.888.304.5136 with any questions about how PMI may affect your individual buyers.