There are so many things you need to understand when purchasing property! Knowing the basics can help you secure the best deals and look after your financial interests.
Private mortgage insurance is an important consideration when it comes to home financing. Understanding what it is and how it works can empower you to make effective, informed decisions that support your home ownership goals, now and in the future.
Wondering about the role of private mortgage insurance in the home financing process? You’ve come to the right place. Here’s what you should know.
What is private mortgage insurance (PMI)?
Private mortgage insurance, or PMI, is a surcharge applied by many mortgage lenders when a homebuyers is borrowing more than 80 percent of the total property value.
PMI exists as a safeguard for your lender. In instances when you are borrowing a large portion of the property cost, PMI protects your lender’s financial interests from the risk of you defaulting on your loan repayments.
In most cases, your lender will determine whether or not you are required to pay for private mortgage insurance and will likely help you liaise with a suitable insurance provider. If required, your insurance plan will be put in place before you close on your mortgage package.
The good news is that PMI costs don’t last forever. Once you reach 20 percent equity in your loan balance, either through repayments or rising home value, you can speak to your lender about removing your PMI fees.
Expected costs of PMI
On average, PMI premiums range between 0.58 to 1.86 percent of your original loan amount. However, this may vary depending on your lender and a range of other factors.
Your loan-to-value ratio (LVR) can influence your PMI payments significantly. Your LVR represents the percentage of your home’s purchase price that you borrow compared to how much you pay as a deposit. The bigger the risk to your lender, the higher your PMI fees will be.
PMI can also be impacted by your credit score. If you have a good credit history, the risk to your lender is lower, and you may benefit from lower PMI fees. If you have a bad credit history, you may be required to pay more.
Your loan type, and the level of risk associated with it, can also affect your PMI fees.
Benefits to paying for PMI
Paying for PMI has one key benefit: it means you can break into the property market even before you’ve saved a 20 percent deposit. This can make it much easier to begin your home ownership journey sooner, especially if you know you can reliably meet your minimum mortgage repayments.
Private mortgage insurance can enable you to start building a real estate portfolio and making the most of the wealth-building benefits home ownership can provide.
Navigating your mortgage can be a challenge, but you don’t have to do it alone. For mortgage support, contact the team at Our Top 10, the best mortgage broker Sydney has to offer.