What Is PMI And How Much Does It Cost? 

Private mortgage insurance (PMI) is an additional cost that you pay when you make a down payment lower than 20%. It protects lenders in case you default on the loan.

The exact cost depends on the type of home loan, but usually falls between 0.46% to 1.5% of the total loan amount. But don’t worry! PMI is not temporary; it ends once you achieve 20% equity in your home.

It is crucial to find a lender suited to your needs that can help you save money on your private mortgage insurance. So, explore lender options near you to make your home-buying journey easy!

What Is Private Mortgage Insurance?

PMI is an additional cost that you have to pay when you put down less than 20% of your home’s purchase price. This insurance protects the lender in case you can’t make the mortgage payments. 

PMI enables you to buy a house with a lower down payment. However, you will have to pay extra each month, on top of your regular mortgage payments.

How Much Does PMI Cost?

Private mortgage insurance isn’t a flat fee. Rather, it is calculated as a percentage of your loan amount. It ranges from 0.46% to 1.5% of the mortgage, depending on your credit score. You generally pay it as part of your monthly mortgage payments. 

Factors Affecting Private Mortgage Insurance

Some lenders permit a combination of upfront and monthly payments, or a single upfront payment at closing. Some of the factors that influence the cost of PMI are: 

• Mortgage Size: The more you borrow, the more you need to pay for private mortgage insurance.
• Down Payment: The percentage of PMI will be higher if you make a down payment less than 20%.
• Loan-to-Value Ratio: The LTV ratio is the ratio of the loan amount to the appraised value of the property. A high LTV ratio, which indicates a small down payment, leads to a high PMI.
• Credit Score: The cost of mortgage insurance is lower for borrowers with a good credit score. If your credit score is 760 or above, your PMI will be low.
• Type of Mortgage: Private loan insurance may cost more for an adjustable-rate mortgage than a fixed-rate mortgage. This is because the interest rate fluctuates in ARMs.

What Are the Types of PMI?

Here are the different types of private mortgage insurance and their benefits:

Borrower-Paid Mortgage Insurance

It is the most common private mortgage insurance. You pay the premium each month, on top of your regular loan payment.

Lender-Paid Mortgage Insurance 

The lender pays the PMI premium upfront, in exchange for a slightly higher interest rate on your loan. It’s the best option if you don’t want to pay insurance every month.

Single-Premium Mortgage Insurance

Here, you pay a one-time upfront premium instead of monthly installments. This is a good option if you want mortgage insurance coverage but would rather have a smaller monthly payment. 

Split-Premium Mortgage Insurance

This type of PMI combines both elements of borrower-paid and single-premium insurance. You pay a smaller upfront premium and a lower monthly premium as compared to traditional borrower-paid insurance. 

Do I Need PMI for All Types of Mortgages?

There are some loans for which PMI is not mandatory. They are:

• FHA Loans: FHA loans are government-insured loans that do not require PMI. Instead, you have to pay a mortgage insurance premium, which may be lower than PMI.
• USDA Loans: USDA loans are government-backed loans primarily intended for low-income rural homeowners who won’t need mortgage insurance.
• VA Loans: The VA loan is designed for veterans and eligible service members. It eliminates the need for private mortgage insurance.

PMI vs. MIP vs. MPI

Here are the key differences between private mortgage insurance, mortgage insurance premium, and mortgage protection insurance.

Feature	PMI	MIP	MPI
Function	Protects lenders against loan default.	Safeguards lenders against default on FHA loans specifically.	Protects the borrower’s capacity to make mortgage payments in the event of financial difficulty.
Duration	Typically ends once the loan-to-value ratio reaches 80%.	Cannot be canceled unless the loan is refinanced.	Can be canceled anytime you want.

Pros And Cons of Private Mortgage Insurance 

Here are the advantages and disadvantages of private mortgage insurance:

Pros 

• Earlier Homeownership: Private mortgage insurance lets you buy a home fast with a low down payment. It helps you avoid delays and potential missed opportunities.
• Favorable Interest Rates: With PMI, you won’t have to delay homeownership due to high interest rates. A competitive interest rate can lead to significant cost savings throughout the loan period.
• Debt Payment: PMI allows you to pay off costly debt with the savings from your down payment.

Cons 

• Increased Overall Costs: The cost of private mortgage insurance is added to your monthly mortgage payments. This can strain your budget and limit your spending power. 
• Difficulties with Cancellation: You may need to refinance the mortgage to cancel mortgage insurance without incurring additional costs. 

How to Get Rid of PMI?

Some effective ways to eliminate private mortgage insurance from your mortgage payments are:

• Reach 20% Equity: It shows your lender that your loan-to-value ratio is lower, and results in the automatic cancellation of your PMI.
• Refinance Your Mortgage: You can refinance your mortgage with a conventional loan at a lower loan-to-value ratio to eliminate private mortgage insurance. However, make sure to consider refinancing costs.
• Home Appraisal: If your home value has increased, a new appraisal might show sufficient equity to get rid of PMI. This approach will require an appraisal fee and lender approval. 

Should You Opt for PMI?

If you make a down payment less than 20%, you need to pay private mortgage insurance. It allows you to save on upfront costs and reach homeownership sooner.

However, PMI premiums can increase your overall mortgage costs. Make sure you find a lender who offers the best terms for you. Browse mortgage lenders near you today!

Frequently Asked Questions

• Buyer
• mortgage terms