If you put down less than 20% on your home, you may be required to pay Private Mortgage Insurance (PMI). Many people misunderstand how the insurance works and why they must pay it. In reality, it’s a helpful way to get a mortgage even when you don’t have 20% to put down on a home.
Understanding PMI
Private Mortgage Insurance is insurance that makes up for the riskiness of your loan if you put down less than 20% on it. Many mortgage programs require as little as 3% – 5% down on the loan, but require mortgage insurance to protect the lender should you default.
You don’t pay PMI forever – you only owe it until you owe less than 80% of the home’s value.
When is PMI Required?
PMI is required when you put down less than 20% of the sales price or you borrow over 80% of the home’s value.
Conventional loans require PMI, but government-backed loans such as FHA and USDA loans have a version of mortgage insurance they require as well. The difference with government-backed loans’ mortgage insurance is you pay the insurance for the life of the loan; PMI doesn’t last forever.
What Does PMI Cover?
PMI is insurance you (the borrower) pay the premiums on, but it covers the lender. If you defaulted on your loan (missed your payments for at least 3 months), and the lenders starts foreclosure proceedings, PMI insurance would pay them back a portion of what they lost.
What Factors Affect your PMI Payment?
Unlike government-backed loans, no two borrowers have the same PMI payments. The amount you owe depends on your loan-to-value ratio and credit score.
If you have a good credit score and put down more than the minimum down payment requirement, you’ll pay less PMI than if you made the minimum down payment and had a low credit score.
How to Pay PMI
You don’t have to worry about figuring out how to pay your PMI; it’s included in your mortgage payment. The insurance company charges the lender an annual amount, but the lender collects it from you monthly. You pay 1/12th of the premium each month with your mortgage payment. You’ll see it broken down on your mortgage statements.
Canceling PMI
Since you only owe PMI until you owe 80% or less of the home’s value, you can cancel it if you’ve made your payments on time and are up-to-date on all payments. When you’re at that point, your payment will be reduced by the amount of the insurance premiums.
Final Thoughts
If you’re thinking about buying a home now, but don’t have 20% to put down, let EPM help you weigh your options. We have many loan options available including those with and without PMI. We’ll show you how PMI can be helpful when buying a home or refinancing, as well as how it compares to other options that may be an option for you.