If you are in the market to purchase a new home and have done research on obtaining a mortgage you have likely heard the term Private Mortgage Insurance. The term PMI is thrown around a lot in the mortgage world; however, many consumers are unaware of what it is and why it can be required.
Oregon home buyers and mortgage shoppers tend to have a lot of questions about private mortgage insurance, or PMI. And rightfully so. PMI can affect the size of your monthly payments, as well as your overall borrowing costs. So it makes sense to learn everything you can about Oregon mortgage insurance.
To aid you in your research, we’ve created a list of frequently asked questions on the subject of Oregon PMI.
What Is Mortgage Insurance?
Mortgage insurance, or MI, is a specialized type of insurance policy that compensates lenders for losses resulting from borrower default.
There are basically two types — private and governmental. Private mortgage insurance, or PMI, is usually applied to conventional home loans that account for more than 80% of the property value. Federal Housing Administration (FHA) loans also have mortgage insurance, but it is provided by the government.
You might be thinking: “Great, here’s one more thing I have to pay.” But there are some significant benefits to PMI, from a borrower’s perspective. The primary benefit is that it allows you to buy a house sooner, without saving up for a 20% down payment. In fact, borrowers today can qualify for conventional home loans with as little as 3% down. This wouldn’t be possible without mortgage insurance.
Frequently Asked Questions about Oregon PMI
Here are some answers to frequently asked questions relating to PMI policies in Oregon.
Will my monthly mortgage payments go up because of PMI?
Yes, but not by much. There are several components that make up a monthly mortgage payment. They include the principal amount borrowed, the interest, property taxes, homeowners insurance, and (in some cases) mortgage insurance. Your monthly payments are primarily determined by the loan amount and the interest rate. Private mortgage insurance represents a relatively small percentage of your monthly payment.
How much does private mortgage insurance cost in Oregon?
The cost can vary based on several factors. Generally speaking, a lower loan-to-value (LTV) ratio will result in lower PMI premiums. So, for example, you would pay less PMI with a 10% down payment compared to a 3% down payment.
The cost of private mortgage insurance in Oregon also varies based on the type of home loan you use, and other factors. The cost can range from around 0.3% to 1.5% of the original loan amount per year, in most cases. We can provide you with a more accurate estimate based on your specific circumstances.
Can I cancel my PMI policy at some point?
Yes, in Oregon it is possible to cancel private mortgage insurance when you’ve paid your balance down to a certain level. PMI can typically be cancelled when the mortgage balance reaches 80% of the home’s original or current appraised value.
This applies to conventional home loans, in particular. Most borrowers who use FHA loans have to pay mortgage insurance for the life of the loan (under current HUD guidelines). So that’s one advantage of using a conventional loan with PMI, as opposed to an FHA mortgage with government-provided insurance
How can I avoid paying mortgage insurance?
There are several financing strategies available that could help you avoid PMI entirely. One way to do this is by taking on a slightly higher mortgage rate. This is known as lender-paid mortgage insurance, or LPMI. Here, the borrower takes on a higher rate in exchange for avoiding PMI.
It’s also possible to combine two loans so that neither one of them accounts for more than 80% of the property value. Remember, having a loan-to-value ratio above 80% is typically what triggers the PMI requirement in the first place. The 80/10/10 strategy is one example. Here, the borrower takes out a first mortgage loan for 80% of the purchase price, uses a second loan for 10%, and pays the remaining 10% as a down payment.
Oregon borrowers can also avoid paying mortgage insurance by making a down payment of 20% or more. This keeps the LTV below 80%.
Military members who are eligible for a VA loan can avoid mortgage insurance entirely, in most cases. And there’s the added benefit of 100% financing, which means no down payment. But this program is limited to military members and veterans.