If you are in the process of purchasing your new home, you may have heard about PMI--or private mortgage insurance. When you don't have enough cash on hand for making a large down payment, you'll be required to pay this insurance to help secure your mortgage. Here is what you need to know about PMI before buying your home.
When Is PMI Needed?
Your mortgage lender will require you to pay PMI when your down payment is less than 20% of your home's value. If provides your bank with an insurance policy that will partially reimburse them if you default on the mortgage.
Having a small down payment is typically the only reason that a mortgage lender would require PMI, but some lenders may not even give you a loan unless you have a 20% down payment. Since PMI is required by the mortgage lender, you cannot avoid paying it if they request it.
How Much Will PMI Cost?
The cost of PMI is based on a how big your loan is, with a larger loan leading to a larger PMI payment. It varies between mortgage lenders but expect to pay between .3%-1.5% of the loan amount.
The monthly payment is determined by taking your loan amount, multiplying by the PMI rate, and dividing that number by 12. For example, a $200,000 mortgage with a PMI of 1.0% will require you to pay $2,000 every year, or $166 each month.
When Will PMI Payments End?
PMI is no longer required when you have paid off 78% of your home's value though it is possible to end PMI payments as early as reaching 80%. While making regular mortgage payments is typically how it is done, there are other ways you can do it.
If you have enough cash saved up, you can make additional payments towards the principal of the loan. Check to make sure you do not have early payment fees, but it may be worth it if these fees are less than the PMI you will pay. If your home has increased in value, either due to self-improvements or a change in the real estate market, you can make a written request to end PMI payments. Keep in mind that you may need a formal appraisal done to prove your home's current value.
For those that don't have enough saved for a large down payment, it's crucial to know about PMI and how it will increase your monthly payment. For more information on PMI, speak with a local mortgage broker (such as one from Premium Mortgage Corp) about it.
Share30 October 2015
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