What is PMI?
Private Mortgage Insurance (PMI) is an insurance policy that protects the lender—not you—if you stop making payments on your loan. It's typically required when you make a down payment of less than 20% on a conventional loan. See my previous post on down down payments, here.
How PMI Works
When you put down less than 20%, lenders view the loan as higher risk. PMI mitigates that risk by ensuring they'll recover their money if you default. Here's what you need to know:
Cost: PMI usually ranges from 0.3% to 1.5% of your loan amount annually, depending on your down payment size, credit score, and loan term.
Payment methods: PMI can be paid monthly (added to your mortgage payment), as a one-time upfront premium at closing, or as a combination of both.
Impact: On a $300,000 loan, PMI might cost $1,500-$4,500 per year, or $125-$375 per month.
When PMI Goes Away
The good news is that PMI doesn't last forever:
Automatic termination: By law, PMI must be automatically terminated when your loan balance reaches 78% of the original purchase price.
Requested termination: You can request PMI cancellation when your loan balance reaches 80% of the original value.
Early termination: If your home has appreciated in value, you may be able to cancel PMI early by getting a new appraisal to show you've reached 20% equity.
You will need to schedule and pay for an appraisal (about $400-$500) so the appraiser can prove you have enough equity for the lender to cancel the PMI.
PMI Alternatives
If you want to avoid PMI but don't have 20% to put down, you have options:
Lender-paid PMI: The lender covers the PMI cost in exchange for a higher interest rate.
Piggyback loans: Taking out a second loan (often a home equity line of credit) to cover part of the down payment. A HELOC takes about a month to process, so be cognizant of this timeline when you are ready to buy a house.
FHA loans: These use Mortgage Insurance Premiums (MIP) instead of PMI, which works differently and may last for the life of the loan.
Is PMI Bad?
PMI gets a bad reputation, but it's not always negative:
Pro: PMI enables homeownership sooner with less money down.
Pro: You might build equity faster in an appreciating market than you would by waiting to save 20%.
Con: It's an additional cost that doesn't build equity.
Con: It increases your monthly payment.
In today's market, with interest rates and home prices where they are, paying PMI might make financial sense compared to waiting years to save a full 20% down payment.
Would you like to know how PMI might affect your specific home buying situation? Give me a call at 615.483.0399 and we can talk about your home buying needs!
