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Understanding Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is a type of insurance paid by the borrower to protect the mortgage lender against financial loss in the event of foreclosure. Unlike government-backed mortgage insurance, PMI is provided by private companies.
How Does Private Mortgage Insurance Work?
Lenders issuing conventional mortgages typically require a 20% down payment. This means they prefer to issue loans for no more than 80% of the home’s market value, known as the loan-to-value (LTV) ratio. For example, on a $300,000 home, a 20% down payment would be $60,000, resulting in an LTV ratio of 80%. If the down payment is less than 20%, PMI is required to cover the difference.
How Much Does PMI Cost?
The cost of PMI varies based on the provider, loan size, loan type, and potentially your debt-to-income (DTI) ratio. PMI can range from 0.5% to 2% of the total loan amount per year. Payment options include monthly payments, upfront payments, split premiums, and lender-paid PMI, each with its own pros and cons.
What to Consider Before Choosing a Loan With PMI
PMI can help you buy a home without a 20% down payment, but it adds to the cost of homeownership. If you want to avoid PMI, consider government-insured loans, saving up for a 20% down payment, or purchasing a less expensive home.
How to Get Rid of PMI
PMI can be canceled once your LTV ratio reaches 80%. This can happen through regular mortgage payments, making extra payments, or an increase in your home’s appraised value. You may need a new appraisal to confirm your home’s value before PMI can be removed.
Can a Good Credit Score Help Me Avoid PMI?
A good credit score might qualify you for an 80/20 mortgage, which avoids PMI by taking out two loans: one for 80% of the property value and another for the 20% down payment. However, these loans have strict requirements and are not available to everyone.
At O1ne Mortgage, we understand the complexities of PMI and are here to help you navigate your mortgage options. Call us at 213-732-3074 for personalized assistance with your mortgage needs. Let us help you get into the home of your dreams!
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