If you’re a first-time homebuyer or have a low down payment when purchasing a home, you may have heard of PMI insurance. PMI, or private mortgage insurance, is a type of insurance that lenders require to protect themselves if you default on your loan. But how much does PMI insurance cost? Let’s take a closer look.
What is PMI Insurance?
PMI insurance is required by lenders when a borrower has a down payment of less than 20% on their home. The insurance protects the lender in case the borrower defaults on their loan. PMI does not protect the borrower, but rather the lender. This is because the borrower is paying for the insurance, not the lender.
The cost of PMI insurance is typically rolled into the monthly mortgage payment. The amount you pay each month will depend on a variety of factors, including the size of your down payment, the type of loan you have, and your credit score.
How Is PMI Calculated?
PMI is calculated as a percentage of the total loan amount. The percentage can vary depending on the lender, but it typically ranges from 0.3% to 1.5% of the total loan amount per year. This means that if you have a $200,000 loan and your PMI rate is 1%, you will pay $2,000 in PMI premiums each year, or $166.67 per month.
How Long Do I Have to Pay PMI?
The length of time you have to pay PMI will depend on when you reach 20% equity in your home. This can happen in a few different ways. You can:
- Pay down your mortgage to the point where you owe less than 80% of your home’s value
- See an increase in your home’s value due to market conditions
- Make improvements to your home that increase its value
Once you reach 20% equity, you can request that your lender cancel your PMI. Your lender is required to cancel your PMI once you reach 22% equity.
Factors That Affect PMI Rates
As we mentioned earlier, the cost of PMI insurance will depend on a number of factors. Let’s take a closer look at some of the most important factors that can affect your PMI rates.
Loan-to-Value Ratio
The loan-to-value (LTV) ratio is the amount of your loan compared to the value of your home. For example, if you have a $200,000 loan on a home that is worth $250,000, your LTV ratio is 80%. The higher your LTV ratio, the higher your PMI rate will be.
Credit Score
Your credit score is another important factor that can affect your PMI rates. Borrowers with better credit scores typically have lower PMI rates, while borrowers with poor credit scores may have higher PMI rates.
Loan Type
The type of loan you have can also affect your PMI rates. For example, FHA loans require borrowers to pay MIP (mortgage insurance premium), which is similar to PMI but has slightly different rates and requirements.
PMI FAQ
Is PMI Tax-Deductible?
PMI used to be tax-deductible, but this benefit expired at the end of 2020. Congress may extend this benefit in the future, but for now, PMI is not tax-deductible.
Can I Avoid PMI?
Yes, there are several ways to avoid PMI. The most common way is to make a down payment of at least 20% of the home’s purchase price. Another option is to take out two loans – one for 80% of the home’s purchase price and another for the remaining amount. This is called a piggyback loan.
Can I Cancel PMI?
Yes, you can cancel PMI once you reach 20% equity in your home. You will need to contact your lender and request that they cancel your PMI. If you don’t request it, your lender may continue to charge you for PMI until you reach 22% equity.
Conclusion
PMI insurance is an important cost to consider when purchasing a home. The amount you pay each month will depend on a variety of factors, including your down payment, loan type, and credit score. While PMI can be costly, there are ways to avoid it or cancel it once you have enough equity in your home. By understanding how PMI works and how it is calculated, you can make informed decisions when purchasing a home.
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