Buying a home with little to no down payment is now possible if you can’t afford to pay 20% of the purchase price. While this seems ideal for those who have little savings, it comes with an additional fee known as private mortgage insurance (PMI). This insures the lender from events like foreclosure and defaulting on a loan, explains an expert from Gethomefinancing.com. This minimizes the risks for lenders by requiring you to purchase an insurance before approving the loan.
The Role of LTV Ratio
It is important to note that you only need to pay PMI when your loan-to-value (LTV) ratio is beyond the maximum threshold (usually 75 to 80%). LTV is the ratio of the loan amount to the value of the property you are buying. Mortgage companies in Fort Myers note that this is also inversely associated with your down payment, with the LTV ratio decreasing as you pay off the loan balance.
Extra Fee and Monthly Payment
Many borrowers who can’t afford a 20% down payment choose to pay a continuous PMI. This is an additional fee on top of your monthly loan payment. The fee may depend on different factors like your credit score, mortgage term, and LTV ratio. It is best to consult your lender to know the PMI fees that apply to your home loan.
Removal of PMI
Lenders will automatically remove the PMI when your LTV is less than the maximum threshold. You can also request the removal of PMI when there is a major renovation that increases the price of the home or if there is home price appreciation in the neighborhood based on recent sales. While requesting to remove the PMI takes time and effort, it is worth it as it can lower your monthly payment.
The best way to remove PMI, of course, is to make at least 20% down payment. If your savings are short, it is advisable to save more first. If the payment size is not feasible, you need to learn more about your PMI, which depends on many factors. Note that the PMI fee is lower if you have a high credit score or a shorter mortgage term.