California and Texas Homebuyers with small down payments are often subject to Private Mortgage Insurance (PMI). Many homebuyers have questions about PMI, why they have to pay it, and how they can avoid it when buying a home.
What Is Private Mortgage Insurance?
Private Mortgage Insurance (PMI) is an insurance policy for conventional loans that protects mortgage lenders from any losses they might incur from mortgage default. So, homebuyers with PMI will still be liable for their mortgage debt even after PMI steps in to make the lender whole.
Homebuyers with conventional financing are usually required to obtain PMI when they put down less than 20%. The word “Private” in PMI distinguishes it from just “Mortgage Insurance” (MI) that is required for FHA/”government” loans.
How Much Does PMI Cost?
The cost of PMI in California and Texas depends largely on the homebuyer’s down payment percentage and their loan-to-value ratio.
Annual PMI premiums typically range from 0.2% to about 1.5% of the loan amount. For example, a homebuyer with a 740 credit score putting a 10% down payment on a $500k house would pay around a 0.38% Mortgage Insurance rate (around $143/month).
This is just a scenario and actual details may vary based on the strength of the homebuyer. Contact a JVM Lending Mortgage Analyst for more detailed figures and purchase scenarios to see how PMI can affect monthly payments.
How To Eliminate Private Mortgage Insurance?
There are three ways that homebuyers can eliminate their PMI payments.
Option #1 – Refinancing
If the property appreciates to the point where lenders can garner a new appraisal to support a value high enough to reduce a homebuyer’s loan-to-value (LTV) ratio to 80% or less, homebuyers can refinance into a new loan with no PMI.
Keep in mind that most appraisers will correlate to the purchase price for the first 6 months, making it wise to wait at least this long to start the refinance process.
Option #2 – Paying Loan Down To An amount Equal To 80% Of Original Purchase Price
Homebuyers can eliminate PMI by paying their loan down if:
- Homebuyers notify their servicer with your request
- Homebuyers have a good payment history
- Homebuyers are willing to prove to their loan servicer that the property has not depreciated with an appraisal (in some cases).
Option #3 – Proving Home Has Appreciated To The Point Where The Loan-To-Value Ratio Is At 75% Or Less
If the homebuyer’s loan is owned/backed by Fannie Mae or Freddie Mac, they can eliminate Private Mortgage Insurance if:
- Homebuyers notify your servicer with your request
- Their loan has seasoned for two years with a good payment history
- Homebuyers provide a current appraisal with a high enough value to support a 75% LTV (if the loan is over 5 years old, the LTV can be 80%).
JVM Lending is a local, family-owned company based in Walnut Creek, California. We serve the entire state, as well as Texas, Arizona and Nevada. We offer a wide variety of mortgage programs and products with flexible qualification criteria. Please contact us if you have mortgage-related questions.