What you need to know about private mortgage insurance.
Mortgage insurance may seem like just one more painful added expense when considering buying a home and how much you can afford. And it's true, private mortgage insurance, or PMI, does increase your monthly payment.
But it also makes it possible for you to achieve homeownership if you're facing certain financial challenges, like a low down payment or less than perfect credit.
And fortunately, it doesn't have to last forever. Here's what you need to know.
What is PMI?
Private mortgage insurance protects your lender if you can't pay your loan back for any reason.
Will I need PMI?
The rule of thumb is, if you have less than 20% of the sales price of the home to put down, your lender will require PMI. Also, if you are taking out an FHA loan, you will need to pay PMI, as FHA loans are by design low down–payment loans.
How much does PMI cost?
The cost of private mortgage insurance varies based on your lender, however much down payment you do have, and your credit history, but it is typically around 1% of your total loan. To calculate your monthly PMI, you'd take 1% of your total loan and divide it by 12; that monthly payment would be folded into your monthly mortgage payment.
Do I have to pay PMI forever?
No. The lender or servicer must stop the PMI when your mortgage balance reaches 78 percent of the original purchase price, or at the halfway point of your amortization schedule. To get your PMI paid off faster, you can pre-pay your mortgage by making additional payments that go directly toward your principal.
Can I refinance and get rid of PMI?
If you have been in your home for a few years, yes. Many homes have shot up in value in the past 3 to 5 years, and mortgage rates are at record lows. If your home's value has increased, you've built up equity that could mean you now owe less than 80% of what the home is worth, which is what that 20% down payment threshold would be. So, a refinance could help you lose the PMI. Just be sure to take into account the closing costs of your new loan.
Another option is to have your home reappraised to see if its value has risen enough that you have sufficient equity to negotiate with your lender to drop PMI.
Although PMI adds to your monthly costs in the short term, it can help you grow financially in the long run by helping you realize the dream and wealth-building of homeownership.