What is PMI Insurance?

Understanding PMI Insurance

PMI insurance, or private mortgage insurance, is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Typically, PMI insurance is required if your down payment is less than 20% of the home’s purchase price. This insurance protects the lender in case you default on your loan. While PMI insurance provides benefits to the lender, it can also help you as a borrower to qualify for a loan that you might not otherwise be able to get. 

The Cost of PMI Insurance

The cost of PMI insurance can vary based on several factors, including your credit score, the loan amount, and the loan type. On average, PMI costs range from 0.3% to 1.5% of the original loan amount per year. This cost is added to your monthly mortgage payment as a PMI premium. For example, if you have a $200,000 mortgage with a PMI rate of 1%, your annual PMI payment would be $2,000, or about $167 per month. 

PMI Insurance and Home Equity

PMI insurance is typically required until you have built up at least 20% equity in your home. As you pay down your mortgage, your loan balance decreases, and your equity increases. Once you reach the 20% equity mark, you can request the lender to cancel your PMI insurance. The Homeowners Protection Act requires lenders to cancel PMI automatically once you reach 22% equity based on the original purchase price. Building equity faster can be achieved by making extra payments on your loan or opting for a shorter loan term.

Comparing PMI Insurance with Other Loan Options

PMI insurance is primarily associated with conventional loans, but other loan types have their own mortgage insurance requirements. For example, FHA home loans require FHA mortgage insurance, and VA home loans, backed by the Department of Veterans Affairs, does not require mortgage insurance but may include a funding fee. Conventional mortgages with PMI insurance can sometimes be more affordable in the long run compared to FHA loans, which have both an upfront mortgage insurance premium and an annual premium.

Managing PMI Insurance Costs

There are several ways to manage or reduce PMI insurance costs. Improving your credit score before applying for a mortgage can help you secure a lower PMI rate. Additionally, making a larger down payment, even slightly above the minimum, can reduce the amount you pay in PMI insurance. Some homeowners consider personal loans or tapping into their savings accounts to increase their down payment. Furthermore, once you’ve built significant equity in your home, refinancing might be an option to eliminate PMI payments altogether. Always consult with your mortgage lender to understand your options and the best strategy for your financial situation.