Buying a home means diving headfirst into the real estate market along with all of its confusing concepts and terms, one of which is Private Mortgage Insurance. In order to help you make the best financial decisions for yourself, let’s look into what Santa Cruz home buyers need to know about private mortgage insurance.
What Is Private Mortgage Insurance?
It’s critical for all homebuyers to understand the terms being used all throughout the process of buying their new property, and Private Mortgage Insurance is a pretty big one that often gets overlooked.
Private Mortgage Insurance, or PMI, is an insurance policy taken out by a lender to help cover the lender’s financial stake in the event that the mortgagor fails to make their mortgage payments on time, and therefore enters default. The lender hangs on to the PMI policy as long as the owner has less than 20% equity – or financial ownership – in the home.
How Does It Affect Me?
As the mortgagor, it could be very easy to never notice that you’re paying private mortgage insurance, but it’s good to know what it does for you.
Ultimately, PMI only affects the homeowner as another part of their monthly mortgage payment. Remember that the insurance policy is taken out by the lender as a protection for their financial investment in the property, so this policy does nothing to cover you as the owner.
A homebuyer will simply pay the increased monthly amounts until they reach that coveted 20% equity threshold and the PMI policy is ended by the lender.
Since the lender’s use of private mortgage insurance is entirely dependent on your equity in the property, there are a couple of surefire ways to completely dodge having to pay a cent to PMI from day one.
The more traditional method to avoid private mortgage insurance is to put down enough money at closing to reach that 20% equity threshold in the home. Putting down 20% guarantees removing PMI from the equation while immediately giving you a huge bump in home equity that you could potentially leverage for a further loan in the future.
The second way of avoiding PMI is substantially riskier and is called a piggyback mortgage. A piggyback mortgage is just as it sounds: Taking out a second mortgage in order to cover the remainder of that 20% down payment on your original mortgage. While this does accomplish the same goal as just putting down 20% at closing, it comes with the added dangers of additional monthly payments to those two separate mortgages.
While the piggyback mortgage can end up being a solution, we do not recommend it for the average homebuyer because it complicates financial dealings and puts the mortgagor in a less ideal position overall.
A final way of avoiding private mortgage insurance is to go through the rigorous process of having PMI canceled on your loan. The Homeowners Protection Act is a federal law that dictates the requirements for private mortgage insurance, as well as the circumstances under which PMI can be canceled.
Special Loan Programs
There are some types of loans that allow for smaller down payments, no down payments, and even some that have no private mortgage insurance despite these lesser down payments.
The two major programs that we are talking about are USDA and VA loans, but they both come with lists of qualifications and restrictions. If you believe you or your home qualifies for either a USDA or VA loan, you should contact your local Federal Housing Administration office to get details on these programs and be guided onward from there.
Help Understanding Private Mortgage Insurance When Buying a Home in Santa Cruz
If you’re thinking of buying a home in Santa Cruz and want to avoid paying private mortgage insurance, contact our team at 831-588-2334!