What is Primary Mortgage Insurance and Why Do You Need It?

Primary mortgage insurance, or PMI, is a type of mortgage insurance that is associated with conventional loans. A PMI is required if you make a down payment of less than 20 percent or if you are refinancing and your equity is less than 20 percent of the home’s value. You can pay for your PMI through monthly premiums, a one-time upfront premium paid at closing, or a combination of both. Here is why you need to know:

  • If you are unable or prefer not to pay at least 20% for a down payment, the lender will require that you have primary mortgage insurance. Between 1 in 3 borrowers take out loans that require PMI, and is also very common among first-time homebuyers. Most loans that are taken out are made with down payments of  3%-15%. The loan-to-value ratio is the amount you are borrowing divided by the property’s market value.
  • There are different ways that you can pay for your PMI. If you want to keep your monthly payments to a minimum, you can pay for a lump sum at closing. You also may be able to add this premium to your overall mortgage so that it is financed over a large period of time rather than annually. The most common way people finance their PMI is through monthly payments through their mortgage with their lender. PMI payments typically range from 0.3% to 1.15% of your loan amount. Some years PMI premiums are even tax-deductible.
  • PMI can help you get approved for a loan for which you otherwise might not qualify, though it will increase the total cost of your loan. It’s also important to note that PMI is used to protect the lender, and will not protect you if you run into problems paying for your mortgage.
  • After you have at least 20% equity in your home, you can ask to remove your PMI from your mortgage if you have good payment history. However, once you have 22% equity, by law the lender must remove it automatically. If your home’s value increases significantly since closing, you may be able to remove your PMI earlier. This typically applies if you have made renovations and improvements to the home.

Check out our website for more information on our homes in Zebulon, NC. Our team would love to help you out with your homebuying process.

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