What Private Mortgage Insurance (PMI) Is & How Much It Costs
When you’re planning to purchase a home, there are plenty of fees and monthly payments that affect your budget. One common fee is Private Mortgage Insurance, or PMI, and it catches many buyers unaware.
How Private Mortgage Insurance is Determined
If you’re a buyer taking out a conventional mortgage loan, be aware of your down payment. A down payment of less than 20% on the home list price means you will be required to pay PMI. PMI protects your lender in case you fail to make your monthly mortgage payments and end up in foreclosure. For you, the buyer, this adds up to more monthly expenses to plan for.
How Much is PMI?
Just how much you’ll pay depends on several variables, including your credit score and your down payment amount. On average, a buyer paying Private Mortgage Insurance 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.
How Long Do You Pay Private Mortgage Insurance?
After you reach 22 percent equity in your home, your mortgage lender is legally required to cancel all Private Mortgage Insurance 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.
Getting Rid of PMI or MIP on FHA Loan
There is one exception to the PMI rule. 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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