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Home Buying, Home Insurance, Mortgage & Home Buying, Article

Private Mortgage Insurance Explained

There are two scenarios where you'll likely have to pay private mortgage insurance (PMI) as part of your home loan:

1. If you're buying a home with less than a 20% down payment, or
2. If you're refinancing your mortgage with less than 20% equity in the home.

Here's what you need to know:

PMI Protects the Lender, Not You
PMI is not like auto or homeowners insurance, which covers you, the owner of the policy. Instead, PMI covers your lender in the event you stop making payments. If you don't have at least a 20% down payment for your home purchase, or 20% equity if you're refinancing, your lender will add PMI to protect itself.

There are Several Ways to Pay PMI
The most common way to pay PMI is a monthly premium that gets added to your principal and interest payment. However, in some cases, a lender may ask you to pay an up-front premium at closing, or some combination of up-front and monthly premium payments. These will be shown on your Loan Estimate and Closing Disclosures under the Projected Payments section, so you'll have a clear idea at the start how it will affect your overall cost.

What's Challenging about PMI?

  • It increases the cost of your loan and (most of the time) your monthly payment.
  • If you're paying PMI, your lender will likely require you to have an impound account for your property taxes and homeowners insurance. You do not get the option of paying taxes twice per year. Instead, the lender will estimate what you have to pay annually and spread it out across your monthly payments.

What's Good about PMI?

  • It helps you purchase a home with a lower down payment (less than 20%).
  • It could be worth it if you're refinancing to a lower-rate loan, which may save you money in the long run.
  • Having an impound account means you don't have to come up with large lump sums to pay your property taxes and insurance when they're due.

When Can I Remove PMI?

  • At Orange County's Credit Union, PMI will be removed when your property's new appraised value is 75% loan-to-value (LTV) for loans two to five years old, and 80% for loans over five years old. You must have a good payment standing on your loan.

Can I Get a Loan Without PMI?
Potentially. Some lenders offer low-down-payment options at a higher interest rate to compensate for not having PMI. Another option is to get a Total Cost Analysis – an Orange County's Credit Union mortgage loan consultant can provide you with easily-to-read charts about the cost of waiting to save for a 20% down payment than just paying for PMI.

The best advice is to work with a mortgage loan consultant who can walk you through your options and help you make the best choice for your individual financial situation.

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