PMI, Private Mortgage Insurance, is usually a financial obligation that your financial institution with whom you funded your Mortgage with will tack onto your mortgage if your down payment is less than 20% of the price of the home you purchased.
The PMI % will depend on the amount of the loan down payment and your credit history. It may run from 0.3% – 1.5 %+ of the original loan amount per year. But, the good news is, there are ways of eliminating this addition monthly premium-BUT you will need to meet the cancellation rules.
The most common pre-requisites are (1) that you can not have taken out a second mortgage on the property or (2) have not had an excessive amount of late payment delinquencies in the previous 2 years (3) the property has not declined in value.
Cancellation will automatically occur when the loan balance amortizes to 78% of the property’s value at the time the loan was secured. You cannot accelerate this process with extra payments.
Lenders are required to terminate your cancellation of PMI request if your loan balance reaches below 80% of the original value. It this case, you can accelerate the process with additional payments on the principal.
If Fannie Mae or Freddie Mac owns your mortgage the current rules apply to the current appraised value not the value at the time the loan was secured. Here you can apply for PMI cancellation after two years if the loan balance is no more than 75% of current appraised value. If after five years, you can choose to apply for PMI cancellation if no more than 80% of current appraised value. Your ratios will be lower if there is a second mortgage, if the property is an investment (non-owner occupied), if the property is not a single family or if you have had recent delinquencies. (Remember, this applies to Fannie Mae or Freddie Mac owned mortgages)
It is a certainly a good investment strategy to plan on trying to pay off the PMI on your mortgage loan as it may yield a considerable amount of cash flow back to you.
For Example: Lets say you are thinking of purchasing your SW Florida Home (I certainly would be happy to help you with that!)
Purchase Price: $275,000.00
Down Payment (15%) $41,250.00
Loan Amount: $233,750.00
Interest Rate: 4.0%:
Monthly Principal & Interest Payment: $ 1115.96
PMI (Private Mortgage Insurance): 66.18
Total Monthly Payment: $1182.14
A great Mortgage & PMI calculator may be found at:
As always, it is best to speak with your financial advisor or tax expert to help guide you in selecting the best financial direction that will meet your needs.
Article sourced from “The Mortgage Professor” Jack Guttentag, PHD.