What to Know About Private Mortgage Insurance (PMI) in Washington

Private Mortgage Insurance (PMI) is an important factor to consider for homebuyers in Washington State. It serves as a safety net for lenders when a borrower is unable to provide a significant down payment. Understanding how PMI works can help you make informed decisions when purchasing a home.

What is Private Mortgage Insurance (PMI)?

PMI is typically required for conventional loans when the down payment is less than 20% of the home’s purchase price. It's designed to protect lenders from losses in the event that the borrower defaults on the loan. For Washington homebuyers, the cost of PMI can vary but is generally between 0.3% and 1.5% of the original loan amount per year.

How is PMI Calculated?

The cost of PMI can depend on several factors, including your credit score, the size of your down payment, and the specific loan program. Lenders use these elements to assess the risk of lending. For instance, a lower credit score may result in higher PMI costs, while a larger down payment could decrease the amount you pay.

Types of PMI:

• Borrower-Paid Mortgage Insurance (BPMI): This is the most common type of PMI. Borrowers pay a monthly premium that is added to their mortgage payment.
• Single-Premium Mortgage Insurance: This option allows borrowers to pay for PMI upfront as a single fee at closing, eliminating monthly payments.
• Split-Premium Mortgage Insurance: This type combines both a one-time upfront premium and a monthly premium. It can be a good option for those who want to lower their monthly payments.

How to Avoid PMI:

Many homebuyers may want to avoid PMI altogether. Here are some strategies to consider:

• Make a Larger Down Payment: If you can afford it, making a 20% down payment eliminates the need for PMI.
• Look for Lender-Paid Mortgage Insurance (LPMI): Some lenders may offer LPMI, where the lender pays the PMI, but this usually comes with a higher interest rate.
• Consider a Second Mortgage: This involves taking out a smaller second mortgage to cover the difference between your down payment and the 20% needed, thus avoiding PMI.

When Can PMI Be Removed?

In Washington, PMI can typically be removed once you have at least 20% equity in your home. This can happen as home values rise or when you make additional mortgage payments. It's essential to notify your lender when you believe you have reached this threshold.

Conclusion:

Understanding PMI is crucial for homebuyers in Washington. While it can add to your monthly mortgage costs, there are ways to manage or avoid it entirely. Whether you're a first-time buyer or looking to upgrade, being informed about PMI will empower you to make better financial choices in your home-buying journey.