Private Mortgage Insurance: What Is It?
While it’s possible to get a mortgage loan with as little as a 3.5 percent down payment (or with no down payment for some special programs), putting down less than 20 percent on a mortgage usually requires you to pay private mortgage insurance or PMI. If you’re currently shopping for a home, here are answers to the most common PMI questions.
Why Do I Have to Pay PMI?
In cases where you’re putting less than 20 percent down on a home, most lenders require PMI to protect their investment in the home in case of loan default and subsequent foreclosure.
How Much Does PMI Cost?
PMI costs vary between 0.3 to 1.5 percent of the total mortgage amount annually, depending on the size of the down payment and your credit score. For a $200,000 mortgage loan, the PMI premium would be $400 – $3,000 each year. The monthly amount is typically included in your monthly mortgage bill by the lender. In other cases, buyers are charged a one-time PMI premium due at closing.
How Long Is PMI Required?
By law, your lender must automatically cancel PMI when you pay down the principal of your loan to 78 percent of the original home valuation. That means that if you put down 10 percent on the mortgage, you’ll be able to drop PMI sooner than someone who only put down 5 percent. However, once your principal balance reaches 80 percent of the original valuation, you can request that PMI be canceled prior to the automatic cancellation.
If the value of your home has increased substantially, you will likely be able to avoid PMI by refinancing the loan. You can also get an appraisal at the cost of $300 to $500 and drop PMI if you have at least 20 percent equity based on the current value, if your lender allows this method of valuation.
Another strategy is to make additional payments toward the loan principal to reach 80 percent of the original valuation more quickly. Even an extra $100 can make a big difference if it’s in your budget.
Are There Other Requirements for PMI Removal?
For PMI to be removed, homeowners must meet a few other criteria. They must request PMI cancellation in writing, have a good payment history, and prove that there are no other liens on the home like a home equity line of credit.
Should I Save 20 Percent to Avoid PMI?
That depends on your financial situation, the cost of living in your area, and other factors. A good mortgage broker can explain the different types of loans and the cost for each, as well as help you make a plan to qualify for the best loan for your budget.