Are you in the market for a home loan? If so, you’re likely to have come across the term PMI, or private mortgage insurance. First-time buyers might well be wondering what PMI is, whether their lender will require it, and for how long. Here’s the scoop on private mortgage insurance, as explained by our lending team at Blackmon Home Loans in Las Vegas, NV.
PMI In A Nutshell
Private mortgage insurance is designed to protect the lender, not the borrower, in the event that you default on your conventional mortgage loan. Although they’re the most common type of home loan, conventional mortgage loans are not backed by the government and therefore have a higher risk of default. Because of this, PMI is typically required when you put down less than 20% on a home purchase and can usually be canceled when you’ve achieved 20% equity in your home.
How PMI Affects You
For many borrowers, the decision of whether or not to pay for PMI is one of the most important factors in choosing a home loan. Now, let’s take a quick look at the pros and cons of private mortgage insurance.
Benefits Of Traditional PMI
- It allows you to buy a home with a smaller down payment.
- It can be canceled when you build up sufficient equity (20%).
- You can take advantage of low mortgage rates.
- You can keep more cash in the bank or in separate investments.
Downsides Of PMI
- You’ll have higher monthly loan repayments until you are able to cancel.
- It doesn’t protect you from foreclosure.
- Private mortgage insurance rates can vary.
- It’s only tax-deductible if you are able to itemize federal tax deductions.
Do All Mortgages Require PMI?
Not all U.S. home loans require private mortgage insurance to be carried until you have 20% equity. It’s generally required for conventional mortgages that are not government-backed. Here are types of mortgages that do not. However, you should note that some of these loans have stricter borrowing requirements or may require different types and amounts of insurance in order to qualify.
- VA Loans
- FHA Loans
- USDA Loans
- Conventional Loans With 20% Or Larger Down Payment
How To Avoid PMI
While PMI does add to your monthly payments, it can be canceled once you reach 20% equity in your home. As a result, conventional loans are a good option for borrowers who are confident in their ability to make their monthly payments and build equity over time. If you want to avoid PMI altogether, consider these options.
- Put 20% or more down towards the home you are purchasing.
- Piggyback is a second loan that covers your down payment on top of the primary mortgage.
- Take out a non-conventional loan, such as a VA or FHA loan, if you qualify.
Additional Types Of Private Mortgage Insurance
There are actually four different types of private mortgage insurance. In this article, we’ve been focusing on the most common type of PMI, borrower-paid monthly. Here are three other types that you might be offered.
- Lender-Paid (LPMI)
- Single-Premium PMI
- Split Premium PMI
- Lender-Paid Mortgage Insurance
As the name implies, LPMI is paid by the lender instead of the borrower. It’s typically available on loans with a down payment of less than 20 percent. LPMI typically results in a higher interest rate, and it may also require the borrower to pay a higher mortgage insurance premium.
Single-Premium PMI
This is paid in a lump sum at the time of closing. It’s usually more expensive than other types of PMI, but it can offer some advantages. For example, it can help to lower your monthly mortgage payments, and it may also provide some tax benefits.
Split Premium PMI
A new type of PMI called split premium PMI has become available in recent years. It allows borrowers to pay a small up-front fee and then a monthly premium. The monthly premium is lower than traditional PMI, and it can be canceled after you’ve built up enough equity in your home. This can save borrowers money over the life of the loan.
Shopping For A Las Vegas Or Henderson Home Loan?
As with any type of loan and accompanying insurance, it is important to understand all of the terms and conditions before signing on the dotted line. Blackmon Home Loans in Las Vegas, NV has many options for local home buyers. If you have any questions about private mortgage insurance or are ready to commit to purchasing a home in the Las Vegas Valley, call today and schedule an appointment with one of our mortgage consultants.