Private Mortgage Insurance Explained
Although some home buyers believe it’s necessary to put down a 20% down payment when buying a home, rising home prices are making it more difficult for buyers to reach that savings goal. There are many low down payment loan programs available to make buying a home more accessible, especially for first-time home buyers. In addition to the familiar government programs like the FHA Loan for low income and first-time home buyers and the VA Loan for Veterans and active-duty military, that allow for low to no down payment, there are also conventional options like the Fannie Mae Home Ready and Freddie Mac Home Possible loans. In fact, the National Association of Realtors reported in 2017, 61% of first-time home buyers put down 6% or less on their home purchase.
When you finance a home with a conventional loan and put down less than 20% you will be required to pay private mortgage insurance or PMI. PMI is an added cost designed to protect the lender in case the borrower defaults.
When do you need to pay PMI?
Typically, if you put down less than 20% on your mortgage you will be required to pay PMI. PMI is only required on conventional mortgages. If you finance with an FHA Loan, you will have to pay an upfront Mortgage Insurance Premium (MIP) and continue paying MIP throughout the life of your loan. PMI is different from MIP because it’s cancellable after the loan amortizes to a certain rate.
How much will PMI cost?
The cost of PMI will vary, but typically it can cost anywhere from 0.3% to 1.5% of the loan amount. The cost of PMI goes down as the size of the down payment goes up. If you can’t put down a 20% down payment, the closer you can get the lower your PMI will be.
How do you pay PMI?
Most homeowners pay for PMI as a monthly premium added to the monthly mortgage statement. Another option is to make one large payment called “single-premium mortgage insurance.” However, if you pay up front and later move or refinance you might not get a refund on your premium. In some cases, you can pay some PMI upfront and some over time.
When can you stop paying PMI?
When you have paid your mortgage balance to 80% of the home’s original value you can ask your lender to cancel PMI. Make sure you are current on your mortgage payments, have a positive payment history with no second mortgages, and submit your request in writing. When the mortgage balance drops to 78% of the home’s original value, your mortgage servicer is required to automatically eliminate PMI. While it’s best practice to be current on your mortgage payments, you do not have to be current for this option. If you refinance mortgage and your new mortgage is 80% or less of the current value of the home, you can also remove PMI.
Paying PMI is a common practice, especially as low down payment conventional loans become more popular. If you have any questions about the cost of PMI and whether or not you will need to pay it, ask us to review your situation.