You add a lot of words to your vocabulary when buying a Lake Havasu home. Down payment. Closing costs. Appraisals. Contingencies. SPDS. Another one that comes up for some home buyers is PMI. But, what exactly is PMI and why do you have to pay for it?
What is PMI?
PMI (Private Mortgage Insurance) is required by lenders when you borrow more than 80% of the purchase price of your home. In other words, if you put down less than 20% for your Lake Havasu dream home, you’re going to pay PMI. What is this? Consider it an insurance policy that covers the lender in case you end up defaulting on your loan. If you utilize a VA loan for your home purchase, you won’t pay any PMI. However, you do pay a funding fee. Some VA loans allow you to roll this funding fee into the monthly mortgage payment. With conventional loans, PMI is usually added to your monthly mortgage payment as well. But you can also pay it up front or part up front and part monthly if you’d like. Most buyers find it more convenient to pay it monthly.
Why Do You Have to Pay PMI?
For most Havasu home buyers and others around the country, coming up with 20% down can be difficult. Some buyers qualify for a home loan with as little as 3%-3.5% down. If you’re buying a home for $200,000, that’s just $6,000-$7000 (3%-3.5%) instead of $40,000 (20% down). Plus, you still must come up with closing costs. And that runs you another 2%-5% of the purchase price. That’s a lot of money. Since mortgage companies aren’t in the home-owning business, they don’t want to be left holding your real estate if you end up walking away. Therefore, they charge PMI.
Will You Always Have to Pay PMI?
Short answer: no. Homeowners aren’t eligible to drop PMI payments until they own 80% of their home’s original value (the value at the time the loan was taken out). The lender is supposed to automatically drop PMI from your loan as soon as you’ve paid off 78% of the original appraised value. You can request that your lender cancel PMI as soon as you have paid off 80% of the original value of your home if you don’t want to wait. Also, you might have a good case for dismissal if you can prove that your current appraisal value provides you with more than 20% equity. If you bought your home more than two years ago, this could be a viable option. You will have to pay for the appraisal fee yourself, though. Even so, that $350 for the appraisal could save you hundreds of dollars a month in PMI payments. So, it’s a good option if you think your value has risen high enough.
If you have questions about PMI, talk to your lender. When you’re ready to look for a new Havasu home or wish to put your current property on the market, contact me.