When a borrower applies for a conventional loan and the down payment is less than 20%, the borrower will probably have private mortgage insurance. Private Mortgage Insurance (or PMI) protects the lender, in the event that the borrower were to default on the mortgage payments. If you refinance a conventional loan and the equity is less than 20% of the value of the home, the need for PMI is also triggered.
The most common way to pay your Private Mortgage Insurance is a monthly premium added to your mortgage payment. It can also be paid with a one time upfront premium paid at closing. If a borrower makes the one time payment and then sells the property or refinances, they will not be entitled to a refund. You could also do a combination of monthly payments and an upfront payment, but this usually works out to be costly as well.
PMI fees vary, depending on the size of the down payment and the FICO credit scores. The PMI costs range from around 0.3% to about 1.5% of the original loan amount per year.
When the borrower’s’ outstanding loan balance drops to 78% of the original value, the borrower has the right to request cancellation of the PMI with their loan servicing company. But, the borrower can also keep track of their property values and they can check to see if they have sufficient equity sooner, which is common in a bull real estate market, as we are currently experiencing.
Borrowers who make a low down payment may also want to consider other types of loans, such as an FHA mortgage. FHA mortgage insurance premiums can’t be canceled. FHA requires that the borrowers’ make your monthly Mortgage Insurance Premium payments for a full 5 years before the premium can be dropped, if the loan term is greater than 15 years.
Loans from the Department of Veteran Affairs (also known as VA Loans) have their own set of rules when it comes to PMI. Borrowers that qualify for a VA loan (must be a veteran) can make no down payment and still will not have to incur a monthly mortgage insurance premium.
Feel free to reach out to Bluefire Mortgage to discuss your loan needs today at (760) 930-0569. We will get you pre-qualified and provide you with a priority home buyer letter within 24 hours of making an application!