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Private Mortgage Insurance Mortgage Insurance (PMI) is provided by a private mortgage insurance
company to protect lenders against loss, if a borrower defaults.
Most lenders generally require PMI for a loan with a loan-to-value (LTV)
percentage in excess of 80 percent.
This means if you buy a $200,000 house and put between $0 and $39,999 as your down payment, you will probably have to pay Mortgage Insurance. This insurance will need to be paid until the ratio between the appraised market value of the house and the amount of the principle on your loan is below 80%.
This happens in 2 ways. First, you pay down your principle with every payment you make on your loan. (NOTE: In the first few years of the loan, you are paying very little on the principle.) The second way that this ratio decreases is by the increase in the value of your new home. This is called appreciation.
The amount of PMI that you pay will vary considerably based on the percentage of down payment that you make. At the time of this writing, if you take out a 95% loan, your PMI will be approximately 0.97% of the loan amount per year.
Example: $200,000 Home
$190,000 (loan amount) x 0.97% = $1843 / 12 = $153.58 / month
If you take out an 85% loan, your PMI will be approximately 0.78% of the loan amount per year.
Example: $200,000 Home
$170,000 (loan amount) x 0.78% = $1326 / 12 = $110.50 / month.
This amount is added to your monthly payments.
As you can see, you will want to be able to remove this insurance payment as soon as possible. You mortgage company should notify you when your principle is close to the 80% mark due to paying down the principle. They may not notify you or even know that the market value of your home has increased.
For anyone living in the Charlotte market area, you can contact Rich Properties for a Comparative Market Analysis to see what the approximate market value of your home is. Then you can compare that to your existing principle. If you are close, your lender will probably want to have an appraisal done, which will cost you some. The Comparative Market Analysis is free.
FHA Loans:
If you have an FHA loan, you will pay a very similar fee called Mortgage Insurance Premium or (MIP). There will be a 1 year premium paid at the time of closing and then a monthly fee which will be about 0.50 % of the loan amount divided evenly over the 12 month period.
Example: $200,000 Home
$195,500 + Closing costs of $2932.00 = Loan amount of $198,432
MIP at closing $2,932.50
MIP monthly: $195,500 x 0.50% = $977.50 / 12 = $81.46
NOTE: Some lenders charge an added interest rate instead of PMI for loan with an LTV of over 80%.
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