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How to Get Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) can seem confusing, but understanding it is crucial for securing a home loan, especially if you have a smaller down payment. This guide breaks down how to get PMI and what you need to know.
What is Private Mortgage Insurance?
PMI protects lenders if you default on your mortgage. Because you're borrowing a larger percentage of the home's value (less than 20% down payment), the lender is at higher risk. PMI mitigates that risk for them. It's a monthly premium added to your mortgage payment.
Who Needs PMI?
Generally, you'll need PMI if your down payment is less than 20% of the home's purchase price. This is true regardless of your credit score, although a higher credit score might influence the premium amount.
How to Obtain PMI
You don't "apply" for PMI in the same way you apply for a mortgage. PMI is automatically included in your mortgage if your down payment is below 20%. The lender will arrange it as part of the mortgage process.
Factors Affecting Your PMI Premium
Several factors influence the cost of your PMI:
- Loan-to-Value Ratio (LTV): The lower your LTV (the smaller your loan compared to the home's value), the lower your PMI premium.
- Credit Score: A higher credit score often translates to a lower premium. Lenders perceive lower-risk borrowers as less likely to default.
- Interest Rate: The interest rate on your mortgage can influence the overall cost, including PMI.
- Type of Mortgage: Different mortgage types may have different PMI requirements.
How to Cancel PMI
The good news is you can usually cancel PMI once you've built up enough equity in your home. This typically happens when your loan-to-value ratio reaches 80%. You'll need to contact your lender to initiate the cancellation process. They'll review your account and determine if you meet the requirements.
When you can cancel your PMI:
- Reaching 20% Equity: Once you've paid down your mortgage to the point where you have at least 20% equity in your home.
- Mortgage Refinance: Refinancing your mortgage with a lower LTV can lead to cancellation.
Important Note: State laws vary, so understanding your specific state's regulations regarding PMI cancellation is essential.
Finding the Right Lender
Choosing a reputable lender is vital. They can provide clear information about PMI and help you understand the costs involved. Shop around, compare rates and fees, and ask plenty of questions before committing to a mortgage.
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