If you make a down payment of less than 20% on your home, you'll probably have to purchase private mortgage insurance, or PMI. When you make a smaller down payment, lenders tend to consider you a higher-risk candidate for a mortgage, and the PMI requirement protects your lender in case you default on your loan. Show
Although PMI makes it possible for prospective homeowners, especially first-time buyers, to qualify for a mortgage with less than 20% down, the monthly premium will add hundreds of dollars to your mortgage payment every month -- so make sure to account for this expense when figuring out your home-buying budget. PMI is required for conventional loans and Federal Housing Association loans, but some loan types, like VA loans, do not require it. Here is everything you need to know about PMI, how it works, when you need it and how much it will cost you over the lifetime of your mortgage. What is PMI and how does it work?PMI offers buyers the opportunity to purchase a home using a conventional mortgage loan with less than the required 20% down payment. PMI protects lenders who offer lower down payment financing options. If you're unable to make a 20% down payment, lenders consider you a riskier borrower with a greater chance of defaulting on your mortgage. If that were to happen, the lender could use the escrowed PMI payments you paid up until default to recoup some of their loss. The cost of PMIBorrowers with PMI pay typically between 0.5% and 1.5% of the loan amount on average each year -- or between $30 and $70 monthly per $100,000 borrowed, according to Freddie Mac. For example, if you take out a $250,000 loan with a 5% down payment, PMI would add between $1,188 and $3,563 annually -- or roughly $100 to $300 tacked on to your monthly mortgage payment. How you pay PMI, whether monthly or yearly, varies by the lender. Some may also allow you to make a partial upfront payment at closing, which can lower your monthly or annual PMI payments. How to lock in a low PMI Rate
When can I stop paying PMI?PMI is typically no longer required once you have at least 20% equity in your home -- whether from paying down the principal or an increase in your home's value. In fact, your lender is required to cancel your PMI once your mortgage balance hits 78% of your home's original purchase price. However, some lenders may have further requirements you must meet before satisfying your PMI obligations. These might include making a set number of mortgage payments, getting a new appraisal or owing less than 80% of your loan principal. Though this process may differ slightly by lender, you can usually request PMI cancellation in writing once you have reached the 80% loan-to-value threshold. You must meet specific requirements as laid out by the Consumer Financial Protection Bureau, including:
Borrowers with Fannie Mae or Freddie Mac mortgages have a different threshold for removing PMI if the mortgage is between two and five years old. For these borrowers, the equity must be at least 25% before PMI can be terminated. The benefits of PMIAlthough PMI adds an additional expense to your monthly mortgage payments, in some cases, it may be worthwhile. Here are a few benefits of PMI:
Downsides of PMIAlthough PMI can help you secure a mortgage with a lower down payment, there are some disadvantages to consider.
Do all home loans require PMI?Though PMI is typically required only for conventional mortgages, other specialized mortgage types have their own version of it -- with their own sets of requirements.
Is PMI worth the expense?There's a trade-off here. PMI increases your monthly mortgage payment but can allow you to buy a house with a lower down payment. That noted, you may be able to forgo PMI if you get a different type of loan such as a USDA, VA or non-PMI conventional loan -- or saving up for a larger down payment. If you decide to go the PMI route, compare private mortgage insurance rates from a variety of lenders before making a commitment. How long do you have to keep mortgage insurance on a conventional loan?If you are current on payments, your lender or servicer must end the PMI the month after you reach the midpoint of your loan's amortization schedule. (This final termination applies even if you have not reached 78 percent of the original value of your home.)
When can you drop PMI on a conventional loan?Conventional PMI goes away on its own when you have 22% home equity. You build equity as you pay down your mortgage and as your home's value increases. You can request PMI cancellation when you have 20% home equity.
Do you have to pay mortgage insurance on a conventional loan?If you put down less than 20% on a conventional loan, you'll be required to pay for private mortgage insurance (PMI). PMI protects your mortgage investors in case you default on your loan. The cost for PMI varies based on your loan type, your credit score and the size of your down payment.
Does PMI go away after 2 years?Many loans have a “seasoning requirement” that requires you to wait at least two years before you can refinance to get rid of PMI. So if your loan is less than two years old, you can ask for a PMI-canceling refi, but you're not guaranteed to get approval.
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