By Ami Shah, Flyhomes Mortgage
Private Mortgage Insurance (PMI) is insurance required by lenders in most scenarios when the borrower makes a down payment of less than 20% on their home purchase. It protects your lender if you default on your mortgage and allows them to recoup losses related to the lower amount of equity in the home. PMI is usually paid as a monthly premium tacked on to your mortgage payment.
Not all loan types require PMI. It’s typically required for conforming and FHA loans. VA loans do not require PMI and many lenders don’t require PMI on jumbo loans, but may offer a higher interest rate instead.
How much does PMI cost?
The amount of the premium that gets added to your monthly payment varies depending on various factors and usually ranges from 0.10% to 1.10% of your loan amount per year.
Factors that influence your rate include:
+ Your credit score
+ The loan program
+ The level of your down payment
For example, if you are applying for a $500,000 mortgage, making a 15% down payment and have an excellent credit score, you can expect to pay about $500 per year, or $42 per month, in PMI.
Remember that PMI rates can vary between lenders so it’s important to take rates into account when choosing a lender.
Ways to get rid of PMI
For conforming mortgage loans, PMI is temporary. There are 3 ways to have your PMI dropped after closing:
1 – If you make your minimum monthly payment and do nothing else, the PMI will automatically be dropped as soon as your loan balance reaches 78% of your original purchase price (or the appraised value of your home, if lower).
2 – You can request to have your PMI dropped sooner, when your balance reaches 80% of your original purchase price (or appraised value, if lower). You must have a good payment record and a new appraisal may be required to ensure the value of the home hasn’t declined.
3 – After at least 2 years, if you believe your home has appreciated in value to where you now have at least 25% equity in the home, you can request to have your home reappraised. As long as your balance is 75% or less of the new value of the home and you have a good payment record, your PMI will be dropped. This is a great option if you make improvements to the home in the short term.
For FHA loans, PMI is required for the life of the loan in most cases so it cannot be removed unless you refinance your mortgage and choose a different type of loan.
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