What is PMI?
PMI stands for private mortgage insurance. It’s an insurance policy that protects a mortgage lender against loss if a borrower defaults on a loan.
Who is asked to pay PMI?
It varies, but lenders typically require PMI on conventional loans with a less than 20% down payment.
How much does PMI cost?
PMI cost varies according to many factors, including the amount you’re borrowing, your loan type and term, your credit score and the amount of your down payment. In general, PMI costs between 0.5% to 1.0% of the total loan amount per year.
How long do I have to pay PMI?
You may ask your lender to cancel your PMI once you’ve built up 20% equity in your home, but they aren’t legally required to remove it until you have 22% equity. Five to seven years is the average, as long as you keep current on your mortgage payments.
How can I avoid PMI requirements?
The simplest way to avoid paying PMI is to increase your down payment to 20%. If that’s not possible, paying as much as you can will help minimize your PMI costs.
Some homebuyers avoid PMI by getting a second loan. For example, a buyer could get one mortgage for 80% of the value of the home, pay a 10% down payment and get the rest of the funds from a home equity line of credit or other loan source. It’s best to check with a financial advisor before deciding on this strategy. PMI is sometimes tax deductible, so it’s important to weigh all the costs and savings of each approach.
To learn more about mortgage insurance or for answers on other financing questions, download our free First-time Homebuyer Guide or call a loan officer at our affiliate, HomeAmerican Mortgage Corporation (866.400.7126).