Private mortgage insurance, sometimes called PMI, is a type of insurance designed to protect the lender in case of a loan default. In other words, if a person cannot pay their mortgage, Private Mortgage Insurance kicks in to cover the cost for the lender. What this means for borrowers is that it is possible to buy a home without needing the full 20% down payment up front. While Private Mortgage Insurance is an additional cost in the long run, it enables anyone to get the home they want as soon as possible.
Why Do I Need Private Mortgage Insurance?
Typically, a lender will require someone to take out PMI if they do not meet certain financial benchmarks. This enables lenders to extend loans to more people while staying protected against loss.
The most common reason someone might be required to have private mortgage insurance is if they make less than a 20% down payment on a home. A lower down payment affects the LTV Ratio of the borrower, at which point many lenders will require a PMI policy.
PMI may also be required in certain refinancing scenarios. If someone is looking to refinance their home, but has less than 20% equity built up in the property, it is likely they will need Private Mortgage Insurance.
How Do I Get Private Mortgage Insurance?
If you require PMI, you don’t need to worry about sourcing it yourself. Your lender will provide the policy and add the cost to your monthly mortgage payments.
How Much Does Private Mortgage Insurance Cost?
Typical costs for PMI range from $40-70 per month, per $100,000 in property value. This value will change depending on factors such as credit score and the LTV ratio of the loan.
This means that, using the median housing cost of $428,700 in the USA for the year 2022, a person would be paying anywhere from $160-280 per month for PMI. While this seems like a lot of money, consider that a 20% down payment on a home of that value would be $85,700 – or almost ten year’s worth of monthly PMI payments.
Private Mortgage Insurance payments are tax-deductible.
How Do I Pay for Private Mortgage Insurance?
Private Mortgage Insurance premiums are typically added directly onto the mortgage payments to the lender. They appear as part of the monthly bill.
Some lenders may also give borrowers the option to pay the PMI premium up front, appended to the closing costs. However, this can be risky; if premium rates change, the borrower will not be able to take advantage of lower rates.
How Can I Cancel My Private Mortgage Insurance?
PMI can be terminated a number of different ways. As long as the borrower’s LTV ratio remains above 80%, they will likely be required to maintain coverage. However, when the borrower eventually builds up 20% equity in the property and their LTV ratio falls below 80%, they will no longer be required to pay for their PMI. Borrowers can manually cancel their PMI at this point, but the insurance will also automatically terminate once the borrower’s LTV falls below 78%.
PMI will also be automatically canceled once the borrower reaches the midway point on their loan. For example, if a borrower has a 30-year mortgage, then as long as they are current with their payments, PMI will terminate 15 years into the mortgage.
The value of your home also has an effect on your LTV ratio. If your home increases substantially in value, and your LTV changes based on that appraisal, you may be able to terminate your PMI sooner than expected.
What’s Right for Me?
PMI exists to make it possible for folks to get their dream homes sooner. Depending on your financial situation and goals, forgoing a larger down payment in favor of paying for PMI may be the right choice. However, you may also prefer to wait, accrue more capital, and put down a larger payment, eliminating the need for PMI.
Talking with a mortgage expert can help you understand your options and make the choice that’s best for you. Get in touch with a mortgage broker in your area, and start planning for the future you want.