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What is PMI?

If you’re in the process of buying a new home, you may have heard the term ‘PMI’. PMI stands for ‘private mortgage insurance’ and acts as a safety net for mortgage lenders. Since buying a home is one of the largest purchases you can make, lenders want to ensure you can afford the home to reduce their risk of loss. 

Do you need PMI?

Before getting approved for a mortgage loan, the lender will calculate your loan-to-value (LTV) ratio as a qualification indicator. The LTV is determined by dividing the mortgage amount owed by how much the home is worth. The higher the LTV ratio, the more likely it is for the lender to take a loss if the loan goes into default. Generally, if you make a down payment of 20% or less of the appraised value of the home, which means an 80% or more LTV ratio, you may be required by your lender to obtain private mortgage insurance.

How to calculate PMI

PMI rates depend on your credit score and down payment amount. Fees vary by lender and typically range from 0.03% to .15% of the beginning mortgage loan amount. For example, if your mortgage loan is $150,000 and your PMI fee is 0.05%, you will be paying $750 a year or $62.50 a month.

How to avoid PMI

If you are required to get private mortgage insurance, the only way to avoid PMI is to lower your LTV ratio to less than 80%. Once you have signed up for PMI, the Homeowners Protection Act requires PMI to be cancelled when your loan has paid down to 78% LTV based on your original appraisal or at the half way point of the loan, such as the end of the 15th year of a 30 year loan. There are a few ways to speed up the process. 

The surest way to find out whether you need to obtain PMI is to get pre-qualified for a mortgage loan. Learn more about our loan features and start your mortgage loan application.

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