Private mortgage insurance or PMI, as it is most commonly referred to, is insurance that protects the bank in case the property goes under foreclosure. Typically, it is required for buyers to pay PMI when their downpayment is less than 20%. Paying PMI doesn’t give the buyer any protection or benefit other than the bank letting them purchase a house with less than 20% downpayment.
Banks have figured out that usually they will recover about 80% of the homes value when a property forecloses. Therefore, they require buyers to pay PMI if they don’t make a 20% down-payment.
How much is Private Mortgage Insurance?
The average annual cost of private mortgage insurance ranges from 0.55% to 2.25% of the original loan amount. For example, on a $300,000 home with a $10,000 downpayment you could expect to pay anywhere from $1,595 – $6,525. This would amount to $132 and $543 respectively.
What factors affect how much PMI you pay?
- Loan amount – The higher your loan amount the more private mortgage insurance you will pay.
- Credit score – The better your credit score the lower your PMI will be.
- Down-payment Amount – The higher your downpayment is the lower you will pay for PMI.
How do you get rid of PMI?
PMI is paid monthly along with your house payment
Typically, you can remove the PMI portion of your monthly payment once your loan amount is at 80%. You can do this by requesting your lender to remove the PMI. Otherwise your lender will automatically remove the PMI when it reaches 78% of the original appraised value.
If you have an FHA loan you will typically have PMI for the term of the loan. In this situation, if you plan on living on the home for many years refinancing in the future to a conventional loan to get a better interest rate and remove PMI may be a good decision.