What is PMI or Private Mortgage Insurance?

Thinking about buying a home? If so, you’ve probably heard that it’ll take a 20% down payment. This information might be overwhelming, to say the least, especially if you don’t have nearly as much in your savings account.

The good news is that a 20% down payment is no longer a traditional mortgage requirement— and it hasn’t been for a while. Several online programs allow borrowers to purchase with less money. For this to happen, though, you might have to pay private mortgage insurance or PMI.

What is PMI?

PMI is a type of mortgage insurance that some borrowers pay when they purchase a home without a 20% down payment.

The term PMI is specific to conventional loans. If you get a USDA or an FHA home loan without 20% down, these programs have their own mortgage insurance, too. VA home loans don’t require mortgage insurance; however, they do require an up-front funding fee.

Mortgage insurance premiums are included with the home loan payment, so they increase your monthly payment. PMI is designed to protect lenders in the event of a foreclosure. When a borrower buys a home with a small down payment, the risk level increases for their mortgage lender. Mortgage insurance provides protection for lenders against this additional risk.

How Much Is Mortgage Insurance?

The cost of mortgage insurance varies depending on different factors, including your loan program, the amount of your down payment, and your credit score. With a conventional loan, PMI annual premiums can range from .50% to 1% of the loan.

FHA home loans have an upfront mortgage insurance premium of 1.75% of the loan amount, with monthly premiums ranging from .45% to 1.05% of the loan—although the majority of borrowers pay about 0.85%.

With a USDA loan, you’ll pay a 1% upfront fee and an annual monthly premium of .35% of the loan amount (paid monthly) for the life of the loan.

How to Get Rid of PMI?

Even though PMI is an added expense with a conventional home loan, the good news is that it isn’t permanent. Mortgage lenders remove PMI once a property has 22% equity, but you can typically request its removal once you have 20% equity.

Like a USDA home loan, mortgage insurance with an FHA mortgage is for the life of the loan—in some situations. If you get an FHA home loan with less than 10% down, you’ll pay mortgage insurance for life. But if you purchase with at least 10% down, you’ll only pay mortgage insurance for the first 11 years.

With a conventional loan, increasing property values and paying down your balance sooner can get rid of mortgage insurance faster. You can’t control how fast your property appreciates, but you can make extra “principal-only” payments to chip away at your balance.

Some people will make one or two extra principal-only payments a year, or some add a little extra to each monthly payment.

How to Avoid Private Mortgage Insurance?

Because this expense increases your monthly payments, you might be interested in ways to eliminate PMI.

The most obvious way is to put down at least 20% when purchasing a home. This can be challenging as a first-time home buyer. But if you’re a repeat buyer, you might have enough profit from a previous home sale to put 20% down on your next purchase.

But what if you want to avoid mortgage insurance without 20% down?

Some mortgage lenders offer portfolio loans, which are loans they don’t sell on the secondary market. Since lenders keep these loans on their books, they tend to have more flexible lending requirements. Therefore, you might be able to get a mortgage with less than 20% down and avoid mortgage insurance. Keep in mind, though, you’ll also pay a higher mortgage rate to compensate for the greater risk, and these loans are not as widely available.

Also, you can discuss a piggyback loan with your loan officer. With this type of loan, you’ll put down 10% and then get a first mortgage for 80% of the home’s price, and a second mortgage for 10% of the home’s price.

Bottom Line

Yes, mortgage insurance is an added cost. However, it can help you purchase a home sooner rather than later. You can start building equity and enjoying stability; plus, buying a home provides a major sense of accomplishment. To learn more about home loan programs available to you, give the loan experts at Blue Spot Home Loans a call or fill out the contact form.