If you put down less than 20% of the purchase price, your home mortgage will probably include private mortgage insurance (PMI). This premium protects the lender in case you can’t pay your mortgage. Find out more about how PMI works and when you can stop paying it. It applies to conventional loans, which don’t receive backing from the US government.
How Do I Pay For PMI?
Your lender should give you several options when it comes to paying PMI. Find out how PMI will affect your payments before committing to a lender. Many consumers want to fold the PMI into their monthly mortgage payment to keep things simple and spread the cost out over time.
Here’s how this works:
1. The lender adds the PMI premium to your mortgage payment.
2. This shows up on the Loan Estimate and Closing Disclosure.
3. You can also opt for a one-time PMI payment due on the closing date.
4. In some cases, you may have an option to pay some of the cost up front and as part of your monthly premiums.
Make an appointment with a Potempa loan officer to review the different options available to you.
How Much Is PMI?
The cost of PMI can vary greatly. Typically, it depends on your credit score and how much money you can put down. As a rule of thumb, it ranges between 0.3% to 1.5% of the loan amount. As part of your preparation to buy a home, it’s important to improve your credit score as much as possible. You can also work on saving money for a down payment, decreasing the cost of the loan and private mortgage insurance.
Sample PMI Calculation
Let’s look at an example of what you might pay for PMI:
1. Assume a PMI rate of 1%.
2. The mortgage loan is for $200,000.
3. Here is how to calculate your PMI annual rate: 1% x $200,000 = $2,000 for your PMI total.
4. Your monthly PMI is $2,000 divided by 12, or $167 per month.
5. If your mortgage is $1,000, it will be $1,167 after adding PMI.
How Long Do You Pay PMI?
Once you have paid off 20% of your mortgage, you no longer need PMI. If you don’t cancel it, the lender will stop charging PMI when you pay off 22% of your home’s appraised value. It’s important to work closely with your lender to determine which payoff options make the most sense for your situation.
Should You Pay Off PMI Early?
If you can pay off your private mortgage insurance early, you can lower your monthly payment for the remainder of your mortgage term. You can cancel PMI insurance after you reach 78% of your original loan amount. By paying off part of your mortgage, you increase the equity in your home, lowering the risk to the lender.
Contact the bankers at Potempa for more detailed information on how PMI works on conventional loans. We can also help you understand the advantages of going with unconventional loans. For example, VA loans do not require PMI