If you’re considering buying a home, you’ve probably heard of private mortgage insurance, or PMI. But what is PMI and how much does it cost?
Private mortgage insurance, or PMI, protects the lender in case you can’t make your payments and default on your loan.
In this article, we’ll explain what PMI is, how it works, and how much you can expect to pay for it. Find out how much it costs and what factors go into the calculation.
What is Private Mortgage Insurance?
Private mortgage insurance is a type of insurance that protects the lender in case you default on your loan.
If you can’t make your payments and the lender forecloses on your home, they’ll be able to recoup some of their losses thanks to PMI.
How Does PMI Work?
When you take out a loan with PMI, the lender requires you to pay for a policy that will insure their investment.
If you default on your loan, the insurer will step in and cover the remainder of the loan. This way, the lender doesn’t lose all
Private mortgage insurance is insurance that protects the lender in case the borrower can’t make their payments and defaults on the loan.
If you have a conventional loan, chances are you’ll be required to pay for PMI – typically, around 1% of the loan amount.
FHA loans also require borrowers to pay for mortgage insurance, although the type of insurance is different.
How much does PMI cost?
The cost of private mortgage insurance (PMI) depends on a number of factors, including the size of the down payment, the loan-to-value ratio and the creditworthiness of the borrower.
Generally speaking, PMI costs range from 0.3% to 1.5% of the loan amount on an annual basis.
For example, if you’re taking out a $200,000 loan with a 5% down payment, your PMI premium would be $1,000 per year, or $83.33 per month.
You can also expect to pay a one-time PMI insurance premium at closing, which is typically equal to 1% of the loan amount.
Therefore, on a $200,000 loan with 5% down, you would owe a $2,000 insurance premium at closing.
Fortunately, you can usually add this amount to your loan balance and spread it out over the life of the loan.
If you plan to stay in your home for many years and build equity quickly, you may decide that paying PMI is worth the extra cost.
However, if you think you may sell or refinance in the near future, it may be wiser to avoid PMI altogether by putting down a larger down payment.
Talk to your lender about your options and see what makes the most sense for your unique situation.
Is PMI Required on All Loans?
Private mortgage insurance, also known as PMI, is required on most loans with less than 20% down.
On a conventional loan, PMI is usually calculated as a percentage of the loan amount and added to your monthly mortgage payment.
The monthly premium is typically between 0.3% to 1.5% of the loan amount, depending on factors such as the size of the down payment, the type of loan, and the borrower’s credit score.
Fortunately, you can get rid of PMI once you reach 20% equity in your home-that is, when the appraised value of your home equals 80% of the original purchase price or loan amount.
At that point, you can contact your lender and request that they remove PMI from your mortgage.
Although PMI can be a nuisance, it is a necessary evil for many borrowers who are trying to achieve homeownership.
How Can I Get Rid of PMI?
There are a few ways to get rid of PMI, or private mortgage insurance. You can pay off your loan, refinance your loan, or wait for your loan to reach 78% ltv ratio.
Loan-to-value ratio is the percentage of the loan amount compared to the value of the property. You can also ask the lender to remove it.
Some lenders will do this once the loan amount reaches 80% ltv ratio and you have a good payment history.
You can try to negotiate with your lender for them to remove it early. Some people choose to keep PMI because it protects them if they cannot make payments and default on their loan.
Having PMI gives peace of mind to some home buyers knowing that their investment is protected. Check with your lender about their specific policies regarding PMI removal.