What is Private Mortgage Insurance (PMI)?
With a conventional mortgage, when your down payment is less than 20%, lenders usually require you to get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage. (This is different from homeowner’s insurance, which protects you in case your property is damaged.)
How much does Private Mortgage Insurance (PMI) cost?
On average, the cost of PMI is 0.5%-2.0% of your loan amount per year. For a $250,000 mortgage, the cost for PMI could be between $1,250-$5,000 per year (or $100-$420 per month).
However, the cost of PMI depends on several factors, including
- Loan size: The more you borrow, the more you pay for PMI.
- Down payment: The more money you put down, the less you pay for PMI.
- Credit score: PMI will likely cost less if you have a higher credit score.
How long do you have to pay for Private Mortgage Insurance (PMI)?
Fortunately, once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your monthly payment. However, there may be additional requirements, such as a history of timely payments and the absence of a second mortgage.
How is Private Mortgage Insurance (PMI) paid?
PMI fees can be paid in several ways, depending on the company used:
- You can choose to pay the first-year’s premium at closing, after which an annual renewal premium is collected monthly as part of your mortgage payment.
- You can choose to pay no premium at closing but add on a slightly higher monthly premium to the principal, interest, tax, and insurance payment.
- If you want to avoid paying PMI at closing but don’t want to increase your monthly house payment, you may be able to finance a lump-sum PMI premium into the loan. Should the PMI be canceled before the loan term expires through refinancing, paying off the loan, or removal by the loan provider, you may obtain the rebate of the premium.
Is there any benefit to having Private Mortgage Insurance (PMI)?
While PMI is an initial added cost, it enables you to buy now and begin building equity, instead of having to wait 5-10 years to build enough savings for a 20% down payment.
How can I avoid paying Private Mortgage Insurance (PMI)?
If you can afford to make a 20% down payment (or have at least 20% equity in your home if refinancing), you will not need PMI. Alternatively, you may be able to qualify for special lending programs (e.g. VA loans), or conventional loans with higher rates, that do not require PMI.