What is PMI and how does it work?

    Kevin Miller of Fairway Mortgage has provided us with some information on PMI. Read about it here and feel free to reach out to him with any questions!

    When purchasing a home many loan programs will require Private Mortgage Insurance or PMI.  While this may have different names, such as Monthly Insurance Premium or MIP, a term used for FHA loans; or Annual Fee, a term attributed to USDA loans, each has to be addressed.

    If a borrower chooses to use a Conventional/Conforming loan program (loan under $453,100 in size) they will need to carry PMI on the loan IF they do not put down at least 20% of the purchase price.  The amount of the monthly PMI is factored based on the loan to value (amount borrowed in relation the purchase price) as well as the credit score.  Meaning, the closer to 20% down, the lower the PMI.  

    The benefit of Conventional/Conforming loan is that PMI can be removed from the loan in the future.  The standard trigger point for the PMI to drop off the loan payment is the point at which the balance of the loan is reduced to 78% loan to value.  Ex. $200,000 purchase price, loan remaining balance reaches $156,000 or less.  The Conventional/conforming loan type carries this option when the property is a PRIMARY residence only.  Therefore, secondary/vacation home and investment properties will carry PMI for the life of the loan. (30yrs, 20yrs, etc.)  

    When a borrower looks at FHA or USDA loans these programs carry the monthly PMI for the life of the loan and do not offer the ability to have it completely removed at ANY time.  Additionally these programs carry a secondary type of insurance known as Up Front Mortgage Insurance Premium or UFMIP for FHA and Guarantee Fee for USDA loans.  This secondary type of insurance is what allows FHA and USDA to offer lower rates then the Conventional/conforming style loans.

    To read more about Private Mortgage Insurance feel free to review this article here: What is PMI? Or reach out to me at 910-465-2414 or kmiller@fairwaync.com

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