If you’re a first-time homebuyer or have limited funds for a down payment, you may be required to pay for private mortgage insurance (PMI) as part of your mortgage payment. In this article, we’ll explain what PMI is, how it works, and what you need to know before taking out a mortgage that requires PMI.
What is Private Mortgage Insurance (PMI)?
PMI is insurance that protects your lender in case you default on your mortgage. If you put down less than 20% of the purchase price of your home, your lender may require you to pay for PMI. PMI typically costs between 0.3% and 1.5% of your loan amount each year, depending on your credit score and the size of your down payment.
How Does PMI Work?
PMI is typically added to your monthly mortgage payment and paid directly to your lender. The amount you pay for PMI is based on the size of your down payment, the loan amount, and your credit score. The lower your down payment and credit score, the higher your PMI payments will be.
Once you’ve paid down your mortgage balance to 80% of the original purchase price, you may be able to cancel your PMI. However, some lenders may require you to have a certain amount of equity in your home or to pay for an appraisal before canceling your PMI. It’s important to check with your lender to understand their specific requirements for canceling PMI.
Why Do Lenders Require PMI?
Lenders require PMI to protect themselves in case you default on your mortgage. If you put down less than 20% of the purchase price of your home, you’re considered a higher risk borrower. PMI helps to offset the risk of lending to you and allows lenders to offer mortgages to borrowers who may not have a large down payment.
What You Need to Know Before Taking Out a Mortgage with PMI
- Understand the Costs
Before taking out a mortgage that requires PMI, it’s important to understand the costs. PMI can add hundreds of dollars to your monthly mortgage payment, which can impact your ability to afford your home. Make sure to factor in the cost of PMI when budgeting for your mortgage payment.
2. Know How to Cancel Your PMI
If you’re required to pay for PMI, it’s important to know how to cancel it. Once you’ve paid down your mortgage balance to 80% of the original purchase price, you may be able to cancel your PMI. However, some lenders may require you to have a certain amount of equity in your home or to pay for an appraisal before canceling your PMI. Make sure to check with your lender to understand their specific requirements.
3. Shop Around for a Mortgage
Not all lenders require PMI, and some may offer lower PMI rates than others. It’s important to shop around for a mortgage and compare rates and fees from different lenders. By shopping around, you may be able to find a lender that offers a lower PMI rate or doesn’t require PMI at all.
4. Consider a Piggyback Loan
If you don’t want to pay for PMI but don’t have a large down payment, you may be able to take out a piggyback loan. A piggyback loan is a second mortgage that you take out at the same time as your primary mortgage. The piggyback loan can be used to cover the down payment and avoid PMI. However, piggyback loans often come with higher interest rates and fees, so it’s important to weigh the costs and benefits carefully.