When you’re considering the total costs of buying and owning a home, it’s easy to focus on the down payment, closing costs, and your monthly mortgage payment. However, there’s another potential expense to keep in mind: Private Mortgage Insurance, or PMI. Depending on the type of loan you choose and the size of your down payment, you might be required to pay PMI as part of your homeownership expenses.
At Avantiway Financial, we believe it’s important to fully understand all the costs involved in purchasing a home. So let’s dive into what PMI is, how it works, and how it may impact your monthly budget.
What Is Private Mortgage Insurance (PMI)?
PMI is an insurance policy that benefits your lender, not you. It’s typically required for homeowners who:
- Have a conventional mortgage (a loan that is not backed by the government).
- Make a down payment of less than 20% of the home’s purchase price.
If your down payment is less than 20%, your lender might require you to carry PMI to protect themselves in case you’re unable to make your mortgage payments. Unlike homeowner’s insurance, which covers damage to your property, PMI helps your lender recover their investment if you default on the loan.
Will I Need to Pay PMI?
Whether you’ll need PMI depends on your loan type and your down payment size. If you’re putting down less than 20% of the home price, there’s a good chance you’ll be required to pay PMI. However, some lenders offer loan products that don’t require PMI—but in return, they often charge a higher interest rate. In some cases, the cost of the higher interest rate could end up being more expensive in the long run than paying for PMI.
It’s important to evaluate your options carefully. If you’re planning to stay in the home for many years, paying PMI may be the more affordable choice. But if you plan to move within a few years, the higher interest rate might not be worth the trade-off.
How Much Does PMI Cost?
The cost of PMI varies based on several factors, including your loan-to-value ratio (LTV)—the amount you owe on your mortgage relative to your home’s value—and your credit score. On average, homeowners can expect to pay between $30 and $70 per month for every $100,000 borrowed. This means that if you’re borrowing $300,000, PMI could add anywhere from $90 to $210 to your monthly mortgage payment.
How Do I Pay PMI?
Typically, your PMI payment will be bundled into your monthly mortgage payment. Just like property taxes and homeowner’s insurance, your PMI premium will be paid into an escrow account. The lender then handles the payment directly to the PMI company.
Will I Pay PMI for the Life of My Loan?
For certain loan types, like FHA loans, PMI may be required for the life of the loan. However, for most conventional loans, you have the opportunity to cancel PMI once you’ve built up at least 20% equity in your home.
To calculate your equity, simply subtract your mortgage balance from your home’s current market value (as determined by an appraisal). Once you reach 20% equity, you can request your lender to remove PMI from your monthly payments.
Additionally, if you’re current on your mortgage payments, PMI will automatically terminate when your loan balance reaches 78% of the home’s original value. Your lender will notify you in writing when this milestone is approaching, but it’s always a good idea to track your own progress as well.
How PMI Fits Into the Bigger Picture
While PMI is an added expense, it can also help you achieve your homeownership goals sooner. If you don’t have enough savings for a 20% down payment, PMI can allow you to buy a home with a smaller down payment and start building equity right away—without waiting years to save more.
In fact, many homebuyers find that paying PMI for a few years is worth it if it means they can begin building equity in their home sooner rather than later. Plus, there are various low-down-payment mortgage options available, some of which allow you to put down as little as 3% of the home’s purchase price. These options may also come with reduced PMI requirements, making homeownership more affordable, even with less than 10% equity.
What’s the Best Option for You?
As you evaluate your mortgage options, it’s crucial to consider your finances, homeownership goals, and long-term plans. PMI can add to your monthly costs, but it may allow you to purchase a home sooner and start building wealth through home equity.
Before making a decision, we recommend speaking with a trusted lender or mortgage advisor who can help you assess your options. At Avantiway Financial, we’re here to help you navigate the complexities of home financing and find the best solutions for your unique needs.
If you’re thinking about purchasing a home and want to understand more about how PMI works, reach out to us at Avantiway Financial. Our team can help guide you through the process and find the mortgage option that’s right for you.