Private mortgage insurance, also referred to as lender mortgage insurance, is the part of the monthly mortgage payment that a buyer pays to the lender if the mortgage is more than 80% of the purchase price of the property. In many cases, PMI is required for loan approval to protect the lender in case the buyer defaults on the loan. Once, payments reach 20% of the principal loan, PMI is removed from the mortgage and from the payments.
Loan to Value (LTV) Ratio
The loan to value (LTV) is what the lender uses to determine whether the buyer will need to pay PMI. To calculate the ratio, simply take the amount of the loan and compare it to the current value of the property. Lenders review the amount of the down payment compared to the purchase price to determine loan to value ratio. If a purchase price is $200,000 with a $20,00 down payment, the loan to value ratio is 90%. Typically, if the loan to value ratio is more than 80%, PMI will be required.
Conventional Financing – PMI can be avoided by financing by having a 20% down payment for the property. Additional options include lender paid mortgage insurance and borrower paid single premium mortgage insurance. In both situations the borrower has the option of paying more in closing costs or accepting a slightly higher inteerest rate in lieu of the monthly mortgage insurance premium.
VA Loans – Although they do not contain PMI however they do have a similar fee called the VA Funding Fee. It is a one time fee charged up front and typically added to the mortgage. The percentage is based upon various factors including down payment, type of qualified military service and whether the Veteran has used his benefits in the past.
FHA Loans – Similar to a VA loan the FHA program has a up front mortgage insurance premium. However there’s also a monthly premium associated resulting in a very costly means of financing.
The good news is that if a buyer does not have a 20% down payment or is not eligible for a VA the mortgage insurance premiums “may” be tax deductible. If you’d like to discuss your individual situation as you prepare to purchase in Virginia, Maryland, Washington DC, Colorado, Florida or North Carolina, please, feel free to call my cell at 757-652-3999.
Pat Bowler | Market Leader & Mortgage Consultant
575 Lynnhaven Parkway Suite 101 | Virginia Beach VA 23452 | 757-652-3999
Movement Mortgage, LLC is an Equal Housing Lender. NMLS # 39179 | 877-314-1499. Movement Mortgage, LLC is licensed by the “Virginia Bureau of Financial Institutions” Lic # MC-5112. Interest rates and products are subject to change without notice and may or may not be available at the time of loan commitment or lock-in. Borrowers must qualify at closing for all benefits. “Movement Mortgage” is a registered trademark of the Movement Mortgage, LLC, a Delaware limited liability company.
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