If you’re thinking about buying a home, or if you’ve already kick-started the home-buying process, it’s important to understand the ins and outs of private mortgage insurance. What is it? Who needs it? How much does it cost? We’re answering all these questions – and more! – in this quick guide to private mortgage insurance.
What Is Private Mortgage Insurance?
Private mortgage insurance (PMI) protects the lender in case a home buyer defaults on their home loan. In other words: if you are unable to keep up with your mortgage payments, your lender won’t be stuck paying the balance. Private mortgage insurance will help to cover the outstanding costs. PMI is very important to lenders, because it enables them to approve more people for mortgages who might not otherwise qualify to become a home buyer.
Who Needs PMI?
Generally, if you’re not able to make a down payment of at least 20%, your lender will require that you pay for private mortgage insurance. Mortgage insurance is also a requirement for FHA loans (which are insured by the Federal Housing Administration), although the terms and conditions are slightly different. Instead of PMI, the home buyer will need to pay a specific up-front mortgage insurance premium covering either 11 years or the life of the loan.
What’s the Cost of PMI?
The total cost of private mortgage insurance usually comes out to around 1% of your loan cost per year, but this varies depending on your credit score as well as your loan-to-value ratio – in other words, the amount you owe on your mortgage compared to its total value. The Federal Home Loan Mortgage Corporation (Freddie Mac) estimates the average monthly PMI to be between $30 and $70 for every $100,000 borrowed.
When Are PMI Payments Due?
PMI payment timelines are usually dependent on the lender. At HUECU, PMI is paid at a monthly premium. Do be aware that if you choose to move or refinance, you won’t get a refund for PMI – which can make it advantageous to choose a lender that offers a monthly payment option, rather than requiring payment of the total insurance cost up front.
What If I Don’t Want to Pay?
If you’re concerned about private mortgage insurance, consider saving up for a bigger down payment before applying for a mortgage. If you can make a 20% down payment, your lender is much less likely to require that you pay for private mortgage insurance. You might also look into an FHA loan: while this will require some insurance premiums, your total cost might be less expensive than a conventional loan. As always, your credit score and other financial particulars, such as overall debt, will make an impact on rates and terms.
Is PMI Tax Deductible?
Since 2017, taxpayers have been able to deduct the cost of private mortgage insurance from their federal tax bill. While the PMI deduction has not been officially extended for 2022, it looks likely that taxpayers will once again receive this advantage.
When Can I Stop Paying PMI?
Private mortgage insurance is not required for the entire length of your mortgage. Once your loan-to-value ratio reaches 78%, lenders must cancel PMI payments. However, extenuating factors – such as if the borrower is behind on mortgage payments – could cause the lender to continue PMI billing until this is remedied.
Regardless of loan-to-value ratio, final PMI termination must occur at the midpoint of the loan, again assuming that the borrower is up-to-date on payments. If you have a loan term of 30 years, PMI will terminate after 15 years. It may also be possible to cancel PMI earlier if your home value increases; but if home value decreases, your PMI payments could be extended.
What If I Have More Questions?
Understanding the ins and outs of private mortgage insurance is no simple task! If you’re concerned about PMI, make a list of questions to ask your lender. The right lender should be happy to answer your questions and address any concerns about what private mortgage insurance costs to expect and how you can prepare to take the next step in your home buying journey.