What is PMI?
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!
