When preparing for a closing on your refinance or home purchase, one of the documents you will be provided with a few days before closing is a HUD-1 Form. This form provides you with valuable information about your loan.
A lot of home buyers in Washington State have questions about private mortgage insurance (PMI). So we’ve created a short guide that explains what mortgage insurance is, why some borrowers have to pay it, and what you can do to avoid it when buying a house.
What Is Private Mortgage Insurance?
Let’s start with a basic definition. Private mortgage insurance, or PMI, is a specialized kind of insurance policy that protects a mortgage lender from losses that might result from borrower default (or failure to repay).
Lenders typically require PMI whenever a borrower puts down less than 20% on a home loan. In other words, this insurance is usually required when the loan-to-value (LTV) ratio exceeds 80%.
How Much Is PMI in Washington State?
The cost of private mortgage insurance in Washington State varies based on the down payment amount, the loan-to-value ratio, and other factors. It’s usually calculated as a percentage of the loan amount.
Annual PMI premiums typically range from 0.3% to about 1.5% of the original loan amount. According to research conducted by Freddie Mac, borrowers can expect to pay “somewhere between $30 and $70 per month for every $100,000 borrowed.”
But these are just industry-wide averages. We can give you a more detailed mortgage loan estimate that will include your PMI costs (assuming you have to pay it). Please contact us if you would like to get a quick rate quote or a more comprehensive loan estimate.
How Can I Avoid Paying PMI?
Borrowers in Washington State can avoid private mortgage insurance by making a down payment of 20% or more, or by combining loans so that neither has an LTV above 80%. This is why Washington home buyers who can afford a larger down payment often make an investment of 20% or more. They do it to avoid the extra cost of PMI.
It’s also possible to cancel private mortgage insurance in Washington State, once you’ve built up enough equity. When you reduce your loan balance to 80% (or less) of the home’s value, you should be able to cancel your PMI policy. That’s if you’re using a conventional home loan.
In contrast, most borrowers with FHA-insured home loans have to pay their FHA insurance premiums for the life of the loan, under current HUD guidelines.
Does It Apply to Conventional and FHA Loans?
A conventional home loan is one that is generated and insured within the private sector, with no government backing or insurance. A Federal Housing Administration (FHA) loan, on the other hand, is insured by the government. That’s the primary difference between conventional and FHA.
In Washington State, the term “private mortgage insurance” usually refers to conventional loans. The FHA program has insurance premiums as well, but that’s the subject of another article.
If you have questions about getting a home loan in Washington State, or if you’d like an estimate of your costs, please contact our staff. We look forward to helping you!