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Private mortgage insurance (PMI) is a hot topic among home buyers in California. Common questions include: How much is PMI in California? When can I cancel the policy? How can I avoid it in the first place?
We’ve created a helpful guide that explains what private mortgage insurance is, why some borrowers have to pay it, and how you might be able to avoid it when buying a house.
Private Mortgage Insurance at a Glance
Let’s start with a definition. Private mortgage insurance, or PMI, is a type of insurance that protects mortgage lenders from losses resulting from borrower default. A “default,” in this context, occurs when a homeowner stops repaying a home loan obligation for some reason.
In California, PMI is arranged by the lender and provided by private insurance companies. Mortgage lenders usually require this kind of coverage in cases where the borrower makes a down payment below 20%. Stated differently, private mortgage insurance is typically required when the loan-to-value (LTV) ratio exceeds 80%.
How Much Is PMI in California?
The cost of PMI in California can vary based on several factors. Down payment size, loan-to-value ratio, and credit scores can all influence the cost of private mortgage insurance.
The rate is usually expressed as a percentage of the loan amount. Annual PMI premiums often range from 0.3% to 1.5% of the original loan amount, but they can fall outside this range in some cases. According to research by Freddie Mac, borrowers in California can expect to pay “somewhere between $30 and $70 per month for every $100,000 borrowed” for a standard private mortgage insurance policy.
But these are just industry averages. As mentioned earlier, there are several factors that can affect the cost of your California PMI policy.
We can provide you with a detailed loan estimate that will include your private mortgage insurance costs (assuming that you have to pay PMI). Please contact us if you would like to receive a mortgage rate quote, or a comprehensive loan estimate showing all of your potential borrowing costs.
How Can I Avoid Paying PMI?
California home buyers can avoid paying PMI by making a down payment investment of 20% or more. It’s also possible to combine two home loans so that neither one of them has an LTV above 80%. (Remember, private mortgage insurance is usually required when the LTV ratio exceeds 80%).
This is why California home buyers with sufficient savings often choose to make a down payment of 20% ore more. They do this to avoid paying PMI in the first place.
Additionally, California homeowners can cancel their private mortgage insurance in some cases. This can be done once you’ve built up a certain level of equity. When you’ve reduced your loan balance to 80% or less (by making your monthly mortgage payments), you should be able to cancel your California PMI policy. This is true for most conventional loans.
The Federal Housing Administration (FHA) loan program is a different story. In most cases, borrowers with FHA-insured home loans have to pay their FHA insurance premiums for the life of the loan, under the current guidelines. So there are pros and cons to consider here. And speaking of FHA…
Do FHA and Conventional Loans Require Insurance?
By definition, a conventional home loan is one that is originated and insured within the private sector. It is not backed or insured by the government. A Federal Housing Administration (FHA) loan, on the other hand, is insured by the government. That’s the key distinction between FHA and conventional mortgage financing.
In California, the term “private mortgage insurance” applies to conventional loans that are insured by private-sector companies, not by the government. The FHA program has insurance premiums as well, but they are the subject of another article.
Do you have questions about getting a home loan in California? Please contact our staff for help. We look forward to hearing from you!