What Is Private Mortgage Insurance (PMI)?

A home purchase is a major accomplishment that calls for a celebration! However, many potential homeowners face the challenge of coming up with the traditional 20 percent down payment. 

Luckily, there are mortgage loans available that allow homeowners to put less down, but it tacks on additional monthly payments in the form of private mortgage insurance (PMI). 

So what is PMI?

Keep reading to learn more about private mortgage insurance and how it can affect your monthly mortgage payments. 

What Is Private Mortgage Insurance?

When you break it down, private mortgage insurance isn’t something that benefits you. Rather, they’re mortgage premiums you pay in the unfortunate event that you default on your home loan. 

If you end up choosing a mortgage loan that accepts less than the 20 percent down payment, the provider requires a PMI in order to reduce risk on their end. 

How Much Does PMI Cost?

The annual cost of your private mortgage insurance can range between 0.58-1.86 percent of the original loan. That means for a $250,000 home, you can expect an additional payment ranging between $117-$374. 

The PMI rate you pay depends on several factors, including the size of the loan, down payment amount, credit score and mortgage loan type. 

How Can I Avoid Paying PMI? 

There are various ways you can get rid of paying PMI or avoid it altogether. 

First and foremost, the easiest way to avoid PMI is by putting down the traditional 20 percent. The advantage of putting down 20 percent means you’ll typically get a lower interest rate, gain equity faster and pay fewer fees. 

For a large majority of homeowners, coming up with the full 20 percent is challenging. So many of them turn to accept help from their families or get the rest of the funds from private money loans

The second way to avoid paying PMI is choosing a loan with a higher interest rate. Of course, this option involves some mental gymnastics to determine if you end up saving more with a higher interest rate or by going with a PMI. 

Sometimes, you’ll come across lenders that have the option to pay the PMI cost in one lump sum or in a combination of a lump sum and additional monthly payments. 

It’s good to note that all current military members and veterans aren’t subject to PMI. However, the VA lenders may require an unavoidable one-time funding fee. 

Do PMI Payments Ever Stop?

The good news is PMI payments completely stop once the principal balance of your mortgage loan falls below 80 percent of the original or current market value. 

However, it’s not as simple as getting your principal below 80 percent as quickly as possible. Providers also consider your history of payments and if you have any additional mortgages. 

Is PMI Worth It? 

The answer depends on your big financial picture. Is it worth finding a lender that doesn’t require private mortgage insurance but offers a higher interest rate? Or is it better to wait and save up the traditional 20 percent down? 

The length of time you plan on spending in the home also plays a critical role in determining in a monthly PMI premium is worth the cost. 

If you enjoyed reading this article, check out some of our other recent posts on mortgages and mortgage loans. 

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