Not everyone can afford the standard 20% down payment when buying a home. Instead, they achieve their dream of home ownership through private mortgage insurance or PMI. So what exactly is private mortgage insurance, and how does it affect your home loan?
What is Private Mortgage Insurance?
Private mortgage insurance or PMI is an insurance policy that conventional mortgage lenders require when homebuyers put down less than 20 percent of the home’s purchase price.
The extra charge helps offset the risk to your lender, and it means you will pay additional money each month in your loan payment. Basically, these funds cover the lender in case the borrower is unable to make their mortgage payments.
What is the Cost of Private Mortgage Insurance?
The cost you pay for PMI varies but typically runs about 0.5 percent to 1 percent of the loan. Additionally, the cost of private mortgage insurance depends on several factors: the size of the mortgage loan, down payment amount, credit score, and the type of mortgage.
When Can You Stop Paying Private Mortgage Insurance?
If you have private mortgage insurance, you’re probably looking forward to the day when it ends so you can enjoy a reduced monthly mortgage payment. Fortunately, there are four different ways to remove private mortgage insurance from your home loan.
- Automatic Cancellation: Your servicer is required by law to automatically cancel the PMI once your loan-to-value reaches 78 percent.
- Early Cancellation: When your mortgage balance reaches 80 percent of your home’s original value, you can make a written request to your lender to cancel your PMI.
- Get a New Appraisal: If property values are rising where you live, you can request early cancellation based on the home’s current value. Your home may also have increased in value if you’ve done any home improvements, such as upgrading the kitchen or adding a bedroom.
- Refinance: Refinancing can help you get rid of PMI if the new loan balance will be less than 80% of the home’s value. However, refinancing will require paying closing costs, so you will want to make sure it will not cost you more than you will save.
Want to learn more about private mortgage insurance and how it could impact you in your homeownership journey? Contact one of our mortgage professionals today!