New home buyers with a down payment of less than 20% usually find private mortgage insurance (PMI) incorporated into their monthly mortgage payment. It’s a logical step for the loan underwriter, because it protects their investment in the case of unfortunate or unforeseen circumstances. Rather than allowing a buyer with very little equity to cover the insurance on their own, that decision is taken out of the equation.
One common misnomer is that the PMI can be stopped once the outstanding loan balance drops below 80%. While this is the case in many circumstances, prospective home buyers should be aware that each mortgage type has its own specific ways of dealing with PMI and other annual fees. As this Team Move OVM Financial Blog notes, the type of loan a home buyer secures will determine if or when PMI will be discontinued.
For example, USDA loans incorporate an annual fee that is similar in concept to PMI, but remains associated with the loan for its duration. The annual fee percentage is tied to the balance remaining on the loan and is recalibrated annually. So while the fee never goes away, it does decrease over time.
FHA loans are a little more complicated, because they have annual fees, PMI and specific criteria that determine if and when PMI can be dropped. Generally speaking, loans with a downpayment of 10% or less retain PMI for the duration of the loan. Those at less than 10% will wind up paying PMI for 11 years.
VA loans include a funding fee on top of the loan amount that is often financed, so it effectively replaces the PMI. Conventional loans are those which are most likely to include provisions for ending PMI, once the loan-to-value (LTV) has dropped below 80% for primary homes, secondary homes or investment properties. In some cases, PMI cancellation is automatic at that time in the loan; for others, a borrower must officially request PMI cancellation.
The biggest takeaway? Make sure you know the structure of your loan and the role PMI plays in it, before you get to closing. Your loan officers, like the professional team at Sanford’s Team Move OVM Financial office will know the terms of your loan. Make sure you do as well. If you’d like more clarity about PMI or loans in general, please feel free to contact the Team Move office at 919-777-0114.