Private mortgage insurance, or PMI, is a mortgage insurance policy that protects your lender in the unlikely event your home goes into foreclosure.
When do I need PMI?
PMI is based on your loan amount and is automatically included in your monthly mortgage payment if you contribute less than 20% toward a down payment. That being said, you’re required to pay PMI until you’ve invested 20% equity in your home or reached 80% loan-to-value (LTV).
For instance, if you purchase a home for $200,000 and you make a down payment of 10%, or $20,000. That means you need a mortgage loan of $180,000 from the Credit Union. It also means your LTV is 90% ($200,000 / $180,000). Once you have enough invested that your LTV hits 80%, the PMI can be removed.
What is the cost of PMI?
Typically, PMI costs about 0.5% to 1% of your loan amount and remains the same throughout the life of the loan if it’s a Federal Housing Administration (FHA) loan, or until you’ve reached 22% equity in a conventional mortgage.
The percentage is based on your LTV, debt-to-income ratio (DTI), and your FICO score.
This means, on a $200,000 loan you could be paying an extra $1,000 to $2,000 per year until you’ve reached 20% equity. Or, an additional $83.33 to $166.67 per month on top of interest, principal, and escrow.
How will I know when to stop paying PMI?
Once you’ve reached 78% LTV you’ll receive a notification in the mail that you no longer need to pay PMI and it will automatically be removed from your monthly payment.
You also have the option to remove it once you’ve reached 80% LTV. However, in order to do so you will need to:
- Contact us and pay for an appraisal
- Refinance if you currently have an FHA
Where do I purchase PMI?
Whomever you’re financing your mortgage through should provide recommendations or they will procure a mortgage insurance certificate themselves.
DuPage Credit Union takes care of the mortgage insurance certificate in-house.
Is PMI tax deductible?
Over the past few years there’s been a bit of back and forth as to whether or not tax deductions for PMI are allowed. On January 8th, 2019, California Representative Julia Brownley made the Mortgage Insurance Tax Deduction Act of 2019 a permanent part of the tax code.
This means that PMI is still tax deductible in 2019, but there are a few requirements.
- Loans must have been purchased in 2007 or later
- PMI can only be deducted for the primary or secondary home
- Only gross income of $109,000 or less are eligible for deductible premiums
PMI for FHA loans vs Low Down Payment Mortgage
If you’re in the market for a mortgage, but don’t have 20% to put down, an FHA loan may seem like the best option. It only requires 3.5% down and is the preferred mortgage loan for those with lower incomes or credit scores. On the flip side, you’ll have to provide upfront mortgage insurance premiums (MIP), as well as pay PMI for the life of the loan or until you refinance. Whereas, with a DuPage Credit Union Low Down Payment Mortgage, there’s no MIP, you’re only required to pay PMI until you’ve reached 80% LTV, and down payments are as low as 3%.
||Low Down Payment Mortgage
Not sure which option is the best one for you? Give us a call at 800-323-2611 or schedule an appointment with one of our experts—we’ll be happy to help!