Private Mortgage Insurance: A Synopsis
You’ve done the math and determined exactly how much you can afford to spend on the home of your dreams, including down payment, monthly mortgage fees, taxes and homeowners insurance. However, you may also be required to pay Private Mortgage Insurance, commonly called PMI.
Buyers who take out conventional mortgage loans and make a down payment of less than 20 percent of the home’s purchase price are required to pay PMI. Essentially, PMI protects the lender in the event that the buyer fails to make monthly payments and ends up in foreclosure, but the bottom line is an added monthly expense for the buyer.
Like many mortgage terms, the exact amount of PMI a buyer will pay is dependent on several factors, including credit score and 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 annually until they reach the threshold of 20 percent equity in the home. Most homeowners choose to pay this additional fee monthly.
Once a homeowner reaches 22 percent equity in the home, the mortgage lender is required by law to cancel PMI premium charges. However, homeowners can request to stop paying PMI at 20 percent equity. For this reason, it’s a good idea to keep close track of all mortgage payments in order to save yourself the extra PMI payments that will occur between the 20 and 22 percent equity thresholds.
One exception to the PMI rule is in the case of FHA loan holders. Buyers who take out FHA loans won’t pay PMI, but rather Mortgage Insurance Premiums (MIP). MIPs will not automatically cease once an equity threshold is reached, so FHA buyers will need to refinance their loans in order to cancel MIP fees once they reach 20 percent equity in the home.
Although PMI fees mean an added monthly expense, many buyers are simply unable to save enough to make a 20 percent down payment in the current financial climate. Lenders who offer conventional mortgage loans with PMI are providing an option for those who otherwise may not be able to finance a home of their own.
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