When you purchase a home, it is not always necessary to have a 20% down payment. In fact, many homebuyers put down as little as 5% or even 3%. However, if you don’t have enough cash to put down 20%, you will likely need to pay for private mortgage insurance (PMI) to protect your lender in case you default on your loan.
What is private mortgage insurance?
Private mortgage insurance is a type of insurance that protects the lender in case you default on your loan. PMI is typically required when you put down less than 20% of the purchase price of your home. The cost of PMI can vary depending on the size of your down payment and the value of your home.
The cost of PMI is usually between 0.3% and 1.5% of the original loan amount per year. For example, if you have a $200,000 mortgage and your PMI rate is 1%, you will pay $2,000 a year for PMI. This cost is typically rolled into your monthly mortgage payment.
How is PMI calculated?
The cost of PMI is typically based on the size of your down payment and the value of your home. The more you put down and the more your home is worth, the lower your PMI rate will be.
PMI rates are also impacted by your credit score. Borrowers with higher credit scores typically receive lower PMI rates.
What are the benefits of private mortgage insurance?
While private mortgage insurance may seem like an added expense, there are several benefits to having PMI:
- Allows you to put down less than 20% on your home purchase
- May help you qualify for a larger loan
- Protects the lender in case you default on your loan
How long do I have to pay for PMI?
Once you have paid down your mortgage to 80% of the original purchase price or appraised value of your home (whichever is less), you can request that your lender cancel your PMI.
If you don’t request to have your PMI canceled, it will typically be automatically canceled once your mortgage balance reaches 78% of the original purchase price or appraised value of your home (whichever is less).
Can I avoid paying for private mortgage insurance?
Yes, there are a few ways to avoid paying for private mortgage insurance:
- Putting down 20% or more on your home purchase
- Getting a piggyback loan (a second mortgage) to cover the difference between your down payment and 20% of the purchase price
- Choosing a lender that offers lender-paid mortgage insurance (LPMI), which is when the lender pays for the PMI and the cost is included in your interest rate or loan amount
Conclusion
Private mortgage insurance is an important consideration when purchasing a home with less than 20% down. While it may seem like an added expense, it can help you qualify for a larger loan and protect your lender in case you default on your loan. Understanding how PMI is calculated and when you can request to have it canceled can help you make informed decisions about your home purchase.
Frequently Asked Questions
What is the purpose of private mortgage insurance?
Private mortgage insurance is designed to protect the lender in case you default on your loan. It is typically required when you put down less than 20% on your home purchase.
How is PMI calculated?
The cost of PMI is typically based on the size of your down payment and the value of your home. PMI rates are also impacted by your credit score.
How long do I have to pay for PMI?
You can request to have your PMI canceled once you have paid down your mortgage to 80% of the original purchase price or appraised value of your home (whichever is less). If you don’t request to have your PMI canceled, it will typically be automatically canceled once your mortgage balance reaches 78% of the original purchase price or appraised value of your home (whichever is less).
Can I avoid paying for private mortgage insurance?
Yes, there are a few ways to avoid paying for private mortgage insurance, such as putting down 20% or more on your home purchase, getting a piggyback loan, or choosing a lender that offers lender-paid mortgage insurance (LPMI).
What are the benefits of private mortgage insurance?
Private mortgage insurance allows you to put down less than 20% on your home purchase, may help you qualify for a larger loan, and protects the lender in case you default on your loan.
Down Payment |
PMI Rate |
Less than 5% |
1.5% |
5% to less than 10% |
0.6% |
10% to less than 15% |
0.3% |
15% to less than 20% |
0.2% |
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