“Understanding Private Mortgage Insurance”: What is private mortgage insurance (PMI) is, how does it work, and when it is required.
When it comes to buying a home, many people opt for a mortgage loan to help finance their purchase. However, if you’re putting down less than 20% of the home’s value, you’ll likely be required to have private mortgage insurance (PMI). In this post, we’ll dive into the details of PMI and help you understand what it is, how it works, and how you can avoid it or get rid of it.
What is Private Mortgage Insurance (PMI)? PMI is a type of insurance that lenders require borrowers to pay when they have less than a 20% down payment on a home. This insurance protects the lender in case the borrower defaults on their loan. Essentially, if you are unable to make your mortgage payments, the insurance company will pay the lender a portion of the amount you owe.
How Does PMI Work? PMI is typically calculated as a percentage of the loan amount and included in your monthly mortgage payment. The cost of PMI can vary depending on factors such as the size of your down payment, your credit score, and the type of mortgage you have.
For example, if you have a $200,000 mortgage and a PMI rate of 0.5%, your annual PMI premium would be $1,000, or $83.33 per month. This premium would be added to your monthly mortgage payment until you reach a certain amount of equity in your home.
When Can You Get Rid of PMI? While PMI can be a necessary expense for some borrowers, it’s important to know that it doesn’t last forever. In fact, there are several ways you can get rid of PMI, including:
- Build Equity: As you make your mortgage payments, you’ll build equity in your home. Once you reach 20% equity, you can request to have your PMI removed.
- Refinance: If you’ve built up enough equity in your home, you may be able to refinance your mortgage to get rid of PMI. This option can be especially appealing if interest rates have decreased since you took out your original mortgage.
- Appreciation: If your home has appreciated in value, you may be able to get rid of PMI without taking any action. If your home has increased in value enough to give you 20% equity, you can request to have your PMI removed.
How to Avoid PMI If you’re looking to avoid PMI altogether, there are several strategies you can use:
- Save for a Larger Down Payment: If you’re able to put down 20% or more of the home’s value, you won’t be required to have PMI.
- Consider a Piggyback Loan: A piggyback loan is a second mortgage that you take out in addition to your primary mortgage. By putting down 10% and taking out a piggyback loan for the remaining 10%, you can avoid PMI.
- Look into VA Loans: If you’re a veteran or active-duty service member, you may be eligible for a VA loan, which does not require PMI.
In conclusion, PMI can be a necessary expense for some borrowers, but it doesn’t have to be a permanent one. By understanding how PMI works and taking steps to build equity in your home or avoid it altogether, you can save money on your mortgage over the long term.