Private Mortgage Insurance Explained

When you’re planning to purchase a home, there are plenty of fees and monthly payments to put a dent in your budget. One common fee is Private Mortgage Insurance, commonly called PMI, and it catches many buyers unawares.

If you’re a buyer taking out a conventional mortgage loan and making a down payment of less than 20 percent of your new home’s purchase price, you will be required to pay PMI. Ostensibly, PMI protects your mortgage lender in the event that you fail to make your monthly mortgage payments and end up in foreclosure. For you, the buyer, this adds up to more monthly expense to plan for.

Just how much you’ll pay depends on several variables, including your credit score and your down payment amount. On average, a buyer paying PMI can expect to pay an additional 0.3 – 1.5 percent of the home’s purchase price each year until they reach the threshold of 20 percent equity in the home. Most homeowners choose to pay this additional fee monthly, though you can choose an annual lump sum payment if you wish.

After you reach 22 percent equity in your home, your mortgage lender is legally required to cancel all PMI premium charges. However, homeowners can request to stop paying PMI upon reaching 20 percent equity. Thus, it’s smart to keep close track of all your mortgage payments in order to save yourself the extra PMI payments that will occur between the 20 and 22 percent equity thresholds.

There is one exception to the PMI rule, and that is in the case of Federal Housing Administration (FHA) mortgage loans. If you take out an FHA loan you won’t pay PMI, but instead a Mortgage Insurance Premium (MIP). MIPs will NOT automatically cease once an equity threshold is reached, so FHA buyers must refinance their loans in order to cancel MIP fees once they reach 20 percent equity in the home.

PMI fees may mean an added monthly expense, but don’t despair if you haven’t saved enough for a 20 percent down payment. PMI payments are temporary, and they make it possible to enter the homeownership ranks even without tremendous cash savings. For more information, speak with a mortgage lender you trust.

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