When you buy a home and make a down payment of less than 20%, a lender will require you to purchase PMI or private mortgage insurance. This is done to insure loss from a loan default provided to lenders by an insurance company. With PMI, you will need to pay a continuous monthly fee when you make your loan payment.
Value of PMI
Mortgage lenders in Lake Oswego note that PMI rates vary depending on different factors. Many who can’t afford a 20% down payment can now purchase their dream home, but have to carry the burden of PMI. Note that it doesn’t give you an extra home insurance coverage, it gives the bank or the lender insurance, in case you can’t fulfill your obligations of paying the monthly fees, explains an expert from Primarynw.com.
The good news is, you can cancel PMI if you owe 75% or 80% or less of the property’s value. Note that you are only required to pay for this insurance when the loan-to-value (LTV) ratio is bigger than lender’s or company’s maximum LTV threshold. LTV represents the ratio of the loan amount to the fair market value of the house. This is also inversely related to the down payment you make (with a 10% down payment, the LTV ratio is 90%).
The Role of LTV
The LTV ratio decreases if you pay down the balance over time or if the home value upsurges. You can request for PMI removal if you think that the LTV ratio is below the set threshold. Note that some lenders may also offer a single, up-front payment of PMI, although this is not common. The value, of course, will depend on the different factors such as your LTV ratio and credit score.
The best way to get rid of PMI is to make a 20% down payment. If this is not possible, it is a good idea to save up first. For homeowners who want to own a home with less money for down payment, consider PMI in the process of paying for a home loan. Once your LTV is lower than the maximum threshold, you can get it removed and save a significant amount.