Here is a blog from a loan officer in Conneticut named George Souto that explains how PMI (Private Mortgage Insurance) works with various loan instruments. I thought this was a very helpful blog especially since many buyers are going FHA today.
Personally, I hate the 5 year rule with FHA, it needs to be changed so that once a buyer meets a certain ratio that PMI payment drops off. We shouldn't be holding back a borrower from putting more equity into their property because they are stuck with an additional PMI payment for a mininum of 5 years if they are financially capable 2-4 years into the loan.
My fifth blog for the ActiveRain contest that Anna 'Banana' Kruchten established in which we are to respond to the 10 most frequently asked questions that we are asked, was about a topic that actually is the source of at least a couple of Frequently Asked Questions. So in the fifth blog I answered the question "PMI/MI Why Do I Have To Pay It?" So in this sixth FAQ blog I will answer the question that normally follows:
"FAQ #6 ......... At What Point Can I Get Rid Of The PMI Or MI?"
I can't blame Borrowers for wanting to know when they can get rid of PMI or MI after seeing what it is costing them each month, it is easy to see why they would want to eliminate PMI/MI as quickly as possible. On a Conventional Mortgage if the Borrower makes the minimal downpayment of 5%, they can expect to see a PMI payment of about $78 dollars per month for each $100,000 they borrow. On a FHA Mortgage if the Borrower puts down the minimal downpayment of 3.5% their MI payment will be $102.58 each month per $100,000.
Private Mortgage Insurance (PMI): On Conventional Mortgages can be eliminated in a couple of ways:
- By paying down the principle balance on the mortgage to 80% of the beginning Loan Amount the PMI payment will automatically be eliminated.
- If the property value goes up due to increased Housing Values, the Borrower can request a new appraisal of the property, and if the remaining mortgage balance is 80% or less of the new appraised value (some times PMI Companies might want 78%) they can request that that the PMI be eliminated.
Note: PMI Companies may require the Borrower to pay PMI for two years before eliminating the PMI.
Monthly Insurance (MI): On a FHA 30 Year Fixed Mortgages can also be eliminated, but in only one way:
MI can only be eliminated after the Borrower has had the mortgage for at least FIVE YEARS, AND (not or), paid down the principle balance on the mortgage to 78% of the original loan amount.
It does not matter how much property values go up during the five year period or after, the MI payment will remain until the principle balance has been paid down to 78%. Also the MI payment will remain even if the principle balance has been paid down to 78%, until the full five years is completed. BOTH the five years and 78% principle balance reduction have to be met, no exception on 30 year FHA Mortgages. The only way to avoid paying MI on a FHA Mortgage, is to do a 15 year or less mortgage, and make a 22% downpayment (78% Loan To Value), otherwise the above will apply.
Previous FAQ's Blogs.
Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or firstname.lastname@example.org
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