Buying a Home With Less Than 20 Percent Down: What to Know About PMI

When buying a new home, the buyer may be subject to pay something called private mortgage insurance (PMI). But what exactly is it, and why do some home buyers have to pay it while others don’t? Here are the answers to those questions as well as others so all new homeowners know exactly what they’re in for with PMI.

What is PMI?

Private mortgage insurance is a special type of mortgage insurance that mortgage companies will give a lender when they pay less than 20 percent of the home’s value as a down payment. This is in order to protect whichever company is loaning the home buyer money for their home in case something happens and they can’t repay the loan. If a homeowner has to pay for PMI, the cost will be added into their normal monthly mortgage payment. However, it’s important to know that paying PMI does not count toward building equity on a home.

What Does PMI Cost?

The cost of PMI will vary from mortgage to mortgage, but typically the home buyer’s down payment or credit score, the higher the PMI premiums are. The PMI rate will be directly influenced by the buyer’s credit score, but average base rates for private mortgage insurance are about $30-70 per month, and this rate increases for every $100,00 borrowed past the first. For example, if someone purchased a home for $300,000,  their monthly PMI cost would be anywhere from $90-210, with $150 being average.

How Long Do I Have to Pay PMI?

Fortunately for the homeowner, paying for private mortgage insurance isn’t a permanent part of the monthly mortgage payments. Homeowners typically only have to pay for PMI for as long as it takes to build equity equal to 20 percent of their Ignacio home’s total value, the exception being with FHA home loans. Once that has been achieved, the lender no longer needs extra insurance from the homeowner because they have proven themselves through paying PMI. Homeowners should contact their lender once they’ve reached 20 percent equity to be sure the extra payment is removed from their monthly mortgage bill in a timely manner. Otherwise, the PMI may be automatically cancelled at 22 percent.

How Can I Avoid PMI?

The easiest way to avoid paying for private mortgage insurance is for the home buyer to pay 20 percent down on their new home because PMI is typically only for buyers who pay with less than that. However, there are some other strategies home buyers can use to avoid paying PMI.

If the home owner is a qualifying US veteran, they can apply for a VA loan that doesn’t require any sort of down payment. These loans do, however, require the buyer to pay a VA funding fee that helps keep the program open and running for future veterans.

Bank of America currently offers an Affordable Loan Solution® mortgage that is aimed at moderate- and low-income home buyers. It allows people to purchase a home with as little as 3 percent down without having to worry about paying PMI later.

Are There Other Types of Mortgage Insurance?

Aside from the usual PMI loans that are described throughout this article, there are also mortgage insurance premiums (MIP) which are similar to PMI but only found when using a Federal Housing Agency (FHA) mortgage. Some other different types of loans will have their own mortgage insurance that are similar, but it’s important to learn the specific nuances when dealing with them.

Private mortgage insurance may seem like an inconvenience, but it’s a small cross to bear when it means helping make home ownership more accessible. Be sure to know exactly what the loan entails and remember there’s nothing to fear about PMI.