What Is Private Mortgage Insurance? l Journey Home Lending
For many first-time buyers, one of the most significant surprises of purchasing a home is the monthly private mortgage insurance charge tacked onto their payments. For those just starting out who don’t have a significant down payment saved up, the cost is predictable but often unexpected.
Private mortgage insurance (PMI) is typically collected by the lender on conventional loans funded with down payments of less than 20%. It provides a bit of protection for lenders against default and thereby helps keeps rates for everyone lower since it helps cover costs of default. It also makes it possible for you to go ahead with purchasing a home when you find the right one or when interest rates are very attractive, even if you can’t come up with 20% immediately.
Important note: PMI is not the same as home insurance. It provides no protection for the borrower on the property. Property insurance will be a separate charge that can typically be folded into your monthly mortgage payment.
How Much Is Private Mortgage Insurance?
The actual cost of PMI will vary based on your loan-to-value ratio, which is to say how much you owe on the mortgage compared to the actual value of the property. Typically, the rate will be between .05 and 1%.
If it’s on the high end of that scale and you take a $100,000 loan, that means you’ll pay $1,000 per year or about $83 per month, assuming your payments are entirely monthly.
The exact rate you’ll pay will be indicated on your loan estimate and in the closing disclosure, so you’ll know in advance what you’re facing. Most PMI is paid on a monthly basis, with that charge folded into your payments, though it can also be paid in an up-front lump sum or with an up-front payment and ongoing monthly charges.
How Long Will I Need to Pay PMI?
While it may feel like PMI is never-ending, there is a horizon. You have the opportunity to cancel your PMI when you’ve paid to 20% equity in the property. Regardless, as long as you keep making your payments the PMI will automatically sunset when your remaining principal balance reaches 78% of the original amount of the loan.
Who Pays PMI?
According to the National Association of Realtors, most people. The organization issued a report that indicates the median down payment is only 12% of the sales price. If that sounds low, consider this: The median down payment from first-time buyers is just 6%.
Need help deciding whether you should opt for a loan with PMI or one that doesn’t have it but comes with a higher interest rate? The experts at Journey Home Lending are ready to help you make the best choice for your situation!