Becoming a homeowner comes with several expenses, and sometimes it can be complicated to understand the different payments you will be required to make when financing your home. One cost that you will more than likely be responsible for paying is private mortgage insurance, especially if you are planning on using a conventional loan to buy your home. If you are interested in purchasing a home in Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee, and are looking for assistance with obtaining a loan and understanding all of the related costs, Foundation Mortgage can help. Read on to learn more about private mortgage insurance, and whether you will need to buy it when you purchase a property.
What Is Private Mortgage Insurance?
Private mortgage insurance, or PMI, is designed to protect a lender if a borrower defaults on a loan and is unable to make monthly mortgage payments. A borrower must pay a monthly insurance premium to an insurer, which will then go towards a portion of the loan balance that is due to a lender. Although it is an additional expense when you buy a home, it can help build a pathway for borrowers who may not typically be eligible to buy a property the chance to become a homeowner. Most lenders will require you to pay private mortgage insurance if you are planning on making less than a 20% down payment on a home with a conventional loan. You will also be required to pay PMI if you refinance your existing mortgage with a conventional loan and have less than 20% home equity built up.
Costs of Private Mortgage Insurance
Private mortgage insurance prices are based on several factors and will vary depending on specific situations. The cost of PMI will first depend on the amount you take out for a mortgage, and the higher that loan amount, the higher your cost for private mortgage insurance will be. The type of mortgage you obtain will also affect your PMI costs. If you opt for an adjustable rate mortgage, (ARM), it tends to be more expensive than a fixed rate mortgage because the interest rate fluctuates with an ARM and poses a higher economic risk. The amount you pay for PMI will also be impacted by your credit score. Essentially, the lower your credit score is, the more you will have to pay for private mortgage insurance. Also, the amount you are able to pay for a down payment will affect your PMI costs; you will ultimately pay less for private mortgage insurance with a higher down payment. It is also important to note that once the balance of your loan reaches 78% of the original purchase price, you will not be required to pay for PMI anymore.
If you are ready to buy a home in Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee, and have questions about private mortgage insurance, contact Foundation Mortgage today for a consultation.