The cost of PMI can vary based on several factors. Let’s take a closer look at how much you might pay in PMI, as well as ways to get rid of it entirely.
What Is Private Mortgage Insurance?
When it comes to home financing, lenders are constantly thinking about risk versus reward. One of the factors that make it seem riskier to lend you money is if you’re taking out a very large mortgage relative to the value of your home. Your down payment helps demonstrate to lenders that you’re serious about your investment, and for conventional mortgages, the magic number is 20%. However, for most of us, putting 20% down is easier said than done. And with home prices increasing rapidly, it’s getting even harder. However, lenders are often willing to give you a mortgage even if you’re not able to put 20% down. But there’s a catch: You’ll have to pay for private mortgage insurance (PMI). PMI is unique compared to other insurance products. You pay for this kind of insurance, yes, but it doesn’t actually benefit you in the traditional sense. Instead, if you default on the loan, PMI benefits your lender. If you agree to pay for insurance to protect your lender, the lender is more willing to give you that mortgage so you can buy a home.
How Much Is Private Mortgage Insurance?
Private mortgage insurance is expensive. The annual premium usually costs between 0.19% and 2.25% of your original mortgage amount. Your lender usually splits up this annual charge into 12 portions, which it tacks on to your monthly mortgage payment. For example, if your annual PMI premium is $1,200, you’d pay an extra $100 each month with your mortgage payment. To see what PMI costs in real terms, here’s how much more expensive your monthly mortgage payments might be, consider the table below, which uses the minimum and maximum PMI ranges (0.19% and 2.25%) for different mortgage amounts. Keep in mind these calculations are based on how much you borrowed, not necessarily what your home is actually worth or what you owe on your mortgage after a few years.
Types of Private Mortgage Insurance
Private mortgage insurance is only used with conventional mortgages. But there are a lot of other types of mortgages, and while they don’t charge “private mortgage insurance” per se, they typically have PMI-like charges.
VA loan funding fee: The Department of Veterans Affairs (VA) charges this upfront fee when you take out a VA loan, regardless of your down payment size. You can pay it outright or roll it into your mortgage. The fee ranges from 1.4% to 2.3% of the loan amount, and it’s waived for certain people, such as service-disabled veterans. FHA loan Mortgage Insurance Premium (MIP): This fee on loans insured by the Federal Housing Administration (FHA) acts as a double-whammy: You’ll pay an upfront fee of 1.75% and an annual fee of 0.45% to 1.05% on all loans, regardless of your down payment. Even worse, this fee is charged for the life of the loan. PMI can be suspended once equity in the home reaches 80% of the value of the equity in your home. Lender-paid mortgage insurance (LPMI): In some cases with conventional loans, your lender might not charge you PMI. They’ll pay it themselves, but you’ll pay in a roundabout way with higher interest charges. Just like with FHA MIP, there’s no way to remove the cost of the PMI. It’s built into the interest rate of the loan, so you’ll have to refinance to get rid of it once you reach 80% equity in your home.
Lowering the Cost of PMI
Paying PMI can be a drag on your finances, but there are ways to lower the cost:
Build your credit: The better your credit score, the lower your PMI cost. There are many things you can do to increase your credit score quickly. Save up a larger down payment: The more you’re able to save for your down payment, the smaller the mortgage you’ll need to take out and the lower your PMI charges might be. If you save enough to get your down payment up to 20%, you won’t have to pay PMI at all. Plan to buy a cheaper home: A home with a lower price tag helps stretch your down payment. For example, if you’ve saved $30,000, you could have a 10% down payment on a $300,000 home—or a 15% down payment on a $200,000 home.
How to Stop Paying PMI
If you’re paying for PMI, here’s how you can get it removed from your monthly payments:
Write your lender a letter: Once you reach 20% equity in your home, based on either its original appraised value or the original sales price (whichever is lower), you can file a request in writing to have the PMI charge removed for the remainder of the loan. This option only applies to conventional mortgages. Wait for it to fall off on its own: Once you reach 22% equity in your home, the PMI charge will fall off automatically from your conventional mortgage payments. Refinance your loan: With FHA loans and any loan with lender-paid mortgage insurance (LPMI), the only way to remove the cost of the PMI is to refinance the loan with a different type of mortgage. If you’ll be refinancing with a conventional mortgage, wait until you have at least 80% equity in the home, or you’ll face PMI again. Get a disability rating: If you receive a service-connected disability rating after you purchase your home using a VA loan, you can apply for a refund of the VA loan funding fee. This is good because the process of getting a disability rating can take a long time, and many people don’t realize they qualify.
