Private Mortgage Insurance (PMI): Everything You Need to Know
Private Mortgage Insurance, commonly known as PMI, is insurance that conventional mortgage lenders require from homebuyers who finance more than 80% of their home’s value. In simple terms, if your down payment is less than 20%, you will likely need to pay PMI.
Who Pays for PMI?
The borrower pays for PMI, but it benefits the lender. The monthly premium is added to your mortgage payment. The cost depends on your loan-to-value (LTV) ratio, loan amount, and credit score.
How Is PMI Calculated?
PMI is usually calculated as a percentage of the original loan amount per year. Rates typically range from 0.20% to 1.50%. For instance, on a $250,000 loan at 0.80%, you would pay $2,000 per year or about $167 per month.
Ways to Avoid PMI
- Make a down payment of 20% or more.
- Use a piggyback loan (80-10-10 loan structure).
- Choose a lender-paid PMI option with a higher interest rate.
- Look for special loan programs that waive PMI requirements.
How to Get Rid of PMI
Once your loan balance drops to 80% of the home’s original value, you can request cancellation of PMI. At 78% LTV, lenders are legally required to cancel it automatically. Refinancing your mortgage can also help if your home has appreciated significantly.
Conclusion
PMI adds to your monthly housing costs but makes homeownership accessible with a smaller down payment. Knowing how to minimize or eliminate it can save you thousands of dollars over time.
