What is a PMI Payment on a New York City Mortgage?
Most New Yorkers are familiar with having to shell out a down payment equivalent to 20% of the property’s price that they are purchasing or renting, but what most are not familiar with, is that PMI is an option for those who can’t come up with the 20% upfront.
What is a PMI Payment?
- PMI or private mortgage insurance that a borrower buys to provide protection to the lender should a mortgage payment be missed.
- PMI is required for a conventional loan borrower who puts down less than 20% for downpayment.
- The cost of this insurance can range anywhere from 0.5% to 1% of the loan amount.
- Payments are usually expected to be made monthly alongside your mortgage.
- You can stop PMI payments once your individual lender's requirements are satisfied, which usually means 78% of your principal is paid off and you have not made late or missed payments.
- Purchasing PMI may be a good fit for you if you want to keep more liquid assets instead of putting 20%, but have enough earnings to make additional monthly payments to your mortgage.
What is PMI?
A PMI, otherwise known as private mortgage insurance, offers your lender protection should you happen to suddenly stop paying back your loan.
Lenders usually require this from buyers whose mortgages are more than 80% of the value of the property.
Borrowers who are unable to pay at least 20% are usually required to purchase PMI as lenders typically view the loan as a riskier investment.
You should be able to view your monthly PMI clearly in either your loan estimate or closing documents.
If you need help understanding the cost, your mortgage lender will be able to provide further information.
To learn more about choosing a mortgage lender, read on: How to Choose a Mortgage Lender in New York?
What is the Cost of Private Mortgage Insurance?
The cost of the PMI ranges from 0.5% to 1% of the entire loan amount on a yearly basis, depending on your credit score and insurer.
While it may not sound like a lot at first, put it into perspective: if you have a 1% PMI fee on a $300,000 loan, you would be paying an extra $3,000 a year or $250 a month on top of what you are already paying for the mortgage.
Once you purchase PMI, the cost is added to your monthly mortgage payment, however, borrowers can opt-out of monthly payments by purchasing single premium mortgage insurance which can be paid as part of the closing costs or financed into the loan.
It is best to check with your lender to see what options they have to offer.
The cost of private mortgage insurance is based on several factors:
- The size of the mortgage loan. The more you borrow, the more you pay for PMI.
- Down payment amount. The more money you put down for the home, the less you pay for PMI.
- Your credit score. PMI will cost less if you have a higher credit score.
- The type of mortgage. PMI may cost more depending on the type of mortgage you have. An adjustable-rate mortgage is usually riskier than a fixed-rate mortgage since the rate can increase, making the PMI cost higher as well.
- Your Loan to Value Ratio (LTV). This is a type of risk assessment that lenders use before approving a mortgage to determine the amount needed for a down payment. This assessment helps them determine if you are “high risk.” If yes, your loan may cost you more.
How Does PMI Work?
Once required, your mortgage lender will arrange PMI via their insurance providers.
You’ll be advised on how many PMI payments you will owe and for how long. You will be required to pay them every month in addition to your mortgage.
Is PMI Tax-Deductible?
PMI was tax-deductible only through the 2017 tax year as an itemized deduction.
However, with the Further Consolidated Appropriations Act, 2020, the deadline was extended through December 31, 2020.
This means it’s available for deductions for the 2019 and 2020 tax years as well as retroactively for 2018.
However, you can only take the PMI deduction if you itemize your deductions, and you might be actually losing money if your total itemized deductions are less than the standard deduction amount.
To learn more about property-related tax breaks, read on What Tax Breaks do Homeowners Get in New York?
When Can You Stop Paying PMI?
PMI can be requested to be removed in writing, but will only be canceled if the below criteria have been met:
- Your mortgage principal balance has reached less than 80% of the loan’s balance or of the home’s current value.
- You make consistent and timely payments. Mortgage payments cannot be 30 days late within one year of cancellation request or 60 days late within 2 years.
- Your loan must be current with payments.
- You must verify that you do not have any second mortgages.
You may need to submit proof upon the lender’s request such as a history of timely payments and not having a second mortgage.
Keep in mind, if you are not current on payments, PMI will still be in effect until payments are up to date.
An appraisal can be useful as it can prove that the home’s value has not decreased below the original value.
When are mortgage lenders required to cancel?
Mortgage lenders are required to automatically cancel PMI once the following have been met:
- The principal balance of the mortgage has reached 78% of its original value.
- The mortgage holder has a good track record with payments.
- The loan does not qualify as high-risk.
Calculate Your PMI
If you’re looking to calculate your PMI, you will first need to find out the loan to value ratio of your home.
The “L” stands for the amount of money you are borrowing while the “V” stands for the value of your home.
You can find the LTV ratio by dividing the loan amount by your home’s value and multiplying the answer by 100.
Say your house is worth $500,000 but you can only put down $100,000.
This would mean that you still owe the mortgage company $400,000. You would divide 400,000 by 500,00 to get 0.8.
Then, you simply multiply .8 by 100 to receive your LTV percentage of 80%.
Once you have this information, you can look at your lender’s PMI chart to see how much PMI you need to pay.
Once you find out how much PMI you need to pay, you would multiply that amount by the amount still owed to the mortgage company to find your yearly PMI rate.
For example, say you calculated that you would need to pay .0075 percent PMI.
You would multiply that by the amount owed in mortgage (in this case it’s $400,000), and you end up with your yearly rate of $3,000.
You can easily divide $3,000 by 12 to figure out what your monthly PMI amount would be $250 per month.
How to Avoid PMI
As a New Yorker, the last thing you need is more money tacked on to your already expensive mortgage. How do you avoid paying PMI?
- Save that 20% down payment. This helps you avoid PMI altogether while also decreasing your mortgage interest rate. You also pay fewer fees and gain equity in your home quicker. It’s a win-win.
- Pay a higher interest rate. Smaller down payments may be eligible to pay a higher interest rate instead of a PMI.
- Save for 10% down payment and get an 80-10-10 loan. Also known as a piggyback loan, this allows you to buy a house with two loans that cover 90% of the home cost. One loan covers 80% of the home price while the other loan covers the 10% down payment.
- Apply for a VA loan. If eligible, a Veterans Affairs loan requires mortgage insurance. FHA loans do not charge PMI, however, they have their own types of mortgage premiums.
- Apply to FHA loans. With FHA loans, mortgage insurance is required to be purchased through the government rather than a private insurance company. MIP or Mortgage Insurance Premium can be removed from an FHA loan after 11 years if you placed more than a 10% down payment when the home was originally purchased.
- Refinance the loan. If your new mortgage is 80% or less of the current home value, you may be able to eliminate PMI altogether as well as lower the interest on the loan due to refinancing.
Furthermore, FHA loans may be difficult to utilize in New York City as a good chunk of New York real estate consists of co-op and condos.
FHA loans cannot be used for the purchase of co-ops, and very few condo boards want to go through the financial vetting process required for FHA-loan approval.
The list of condo buildings approved for FHA is excruciatingly small. However, it may be an option for a first-time buyer interested in a single-family home or a townhouse.
Learn more about the home buying process and ways to pay for a down payment by reading: What You Need to Know Before You Buy Property in New York.
What are the differences between MIP and PMI?
MIP is government-administered and therefore has restrictions.
The FHA has maximum loan limits that are usually lower than those with PMI, meaning it may cost more.
FHA insurance lasts for the duration of the loan. PMI can be removed.
Pros and Cons of PMI
There are both advantages and disadvantages when it comes to PMI, so be sure to weigh all options before deciding.
- Purchase a home with a lower down payment. If you need a house fast and can’t wait to save for a down payment, this allows you to snag the home of your dreams.
- You get more wiggle room with your money. Need more money for furniture or fix ups? Having PMI allows you to spend less of your cash upfront so that you can save more.
- PMI is temporary. After you pay 20% of your home off, you can cancel your PMI.
- PMI is an additional monthly cost. Your already expensive mortgage is about to get even more expensive. PMI usually costs anywhere from 0.5%-1% of the entire annual loan amount in addition to your mortgage and other associated fees.
- PMI is in place only to help the mortgage lender. This insurance is not designed to protect you, but your mortgage lender. This type of insurance will not leave any inheritance to your heirs.
- Can be difficult to terminate. While you can cancel PMI after you pay off 20%, you may be required by your lender to send a written cancellation notice as well as an official appraisal of the property before the PMI can be removed.
4 Different Types of PMI
- Single premium
- Split premium
This is the most basic of PMIs.
It gets added as an additional monthly cost to your mortgage and can be canceled. BPMIs are usually set at a fixed rate throughout your mortgage.
Your lender will front the cash for your mortgage insurance but at a higher mortgage rate.
Keep in mind, however, that this type of insurance cannot be canceled.
A plus side is that your monthly payments may still be less than when making monthly PMI payments and you may qualify to borrow more.
Single premium PMI (SPMI)
You can skip the monthly payments and instead opt to pay one single fee upfront.
The one downside to a single premium is that it is non-refundable.
Read more on other closing costs: What is the NYC Transfer Tax in a Real Estate Purchase?
Split premium PMI
This lesser-known private mortgage insurance allows you to pay a part of the insurance in a lump sum at closing and the rest is paid on a monthly basis. It is basically a combination of BPMI and SPMI.
What is the Best Type of PMI?
The best type of PMI is the one that works best for you, so be sure to weigh your options and see which one can fit your goals and budget.
Depending on your current situation, finances, and goals, you might find that different types of PMI might work better for you.
For example, homeowners who don’t plan on moving or refinancing might want to explore buying out their mortgage insurance with LPMI or a borrower-paid single premium.
Meanwhile, those whose future is less predictable may prefer the basic borrower-paid PMI as it provides the lowest risk.
It is important to fully explore your options to see what works best for you and the situation at hand.