• dsmulonas

PFT #4 - Personal Finance Tip of the Week: What is PMI and How to Get Rid of it

Updated: 5 days ago

-This week's topic is about private mortgage insurance otherwise known as PMI.

-We will tell you hoe to calculate PMI

-We explain what PMI is and how to remove it


David

This is a great topic as sales of new homes have been very robust for many months now especially with the low mortgage interest rates.


Cindy

So what is so what is PMI. This is insurance that you provide for the mortgage lender meaning that you pay for it on behalf of the lender in case you default on the loan.


David

Yes you heard that right. This insurance that you pay for. This is a unique item in the personal finance world due to the fact that the biggest asset for most people is their home and therefore, lenders need to manage their downside risk.


Cindy

We can't really think of anything that you pay insurance for on behalf of somebody else.


So with that being said, PMI occurs when you do not have at least 20% of equity or 80% loan to value when you purchase the home.


David

For example, if you buy a home for $200,000 and your loan is more than $160,000 then this means that you will pay PMI.


Cindy

With being said, PMI costs can range from 0.25% to 2% depending on factors such as the size of the down payment and mortgage as well as the loan term, and the borrower's credit score.


David

Now how do we calculate PMI? For example, let's say we take a $160,000 mortgage with a PMI rate of 1%. What you do is calculate that $160,000 and multiply that by 1% which comes to $1,600 and divide that by 12, and that would make the monthly payment approximately $133.


Cindy

So how do we get rid of PMI?


David

There are three options:


1) Put 20% down on the home when you purchase it; however, make sure that you factor in the closing costs and other items such as taxes and insurance.

2) If you already have PMI you can get an appraisal proving that the difference between the value of the house and the mortgage is no less than 78% loan to value (LTV). Keep in mind an appraisal generally runs between $300 and $500.


Cindy

3) The third way is to have 78% loan to value based on what your mortgage started at against what you currently owe on the loan.


David

Okay, let’s provide a couple points of note. Make sure that you call your lender and tell them you are at 78% loan to value and verify that you do not need an appraisal.


Cindy

In any event, most lenders will not automatically drop your PMI if you're at 78% loan to value unless you contact them. It is one of those things that they're required to do; however, it doesn't mean they actually will.


David

So hopefully with the house values growing, you have an opportunity to remove this PMI and put add a few more dollars in your budget.