As a first-time homebuyer, it may take time to save enough for a 20% down payment. PMI may provide assistance as you purchase your dream home.
Your lender may charge either an upfront premium at closing or incorporate monthly PMI premiums into your mortgage payments; each option has unique costs and advantages.
What is it?
PMI protects lenders from potential losses should you fail to make mortgage payments as agreed, with most conventional lenders mandating PMI for those making down payments of less than 20%. You can pay this insurance either monthly, upfront or hybrid style.
PMI comes in various forms, but one common one is borrower-paid premiums added directly into your monthly mortgage payment. You may also elect to prepay and reduce annual expenses.
Saving for a larger down payment or using a piggyback loan (a second mortgage taken out alongside your primary loan) could help you reach 20% equity quicker, eliminating PMI in its tracks faster. Both these strategies could increase overall home financing costs; waiting could cost even more due to rising prices and limited inventory.
How much does it cost?
PMI costs can differ for each loan amount and credit score combination; therefore, building good credit and saving for a down payment are key components in lowering mortgage insurance expenses.
Lenders frequently require borrowers to pay an up-front premium at closing and an ongoing monthly premium as part of their mortgage payment, often as a percentage of the home’s value and representing an extra cost to keep a loan active.
Loan Estimate and Closing Disclosure, page 1, Projected Payments section typically shows this premium for each borrower. Some lenders do offer PMI-free mortgages for borrowers making down payments of less than 20%; however, these typically come with higher interest rates.
As soon as they reach at least 20% equity in their home or refinancing to another type of loan, borrowers can request cancellation of PMI. Lenders may require an appraisal to ensure the value of your home has increased over time.
How do I get rid of it?
Your lender is required to automatically cancel PMI once your loan balance has dropped below 80% of the original value, however you can request it be cancelled earlier if desired. To expedite this process and build equity more rapidly faster try making extra payments towards principal and directing any extra money directly towards it – even sending a note with any extra payment to let your lender know you want this extra money applied toward loan principal.
Refinancing may also save money. Although this may require incurring refinancing closing costs, the savings in PMI payments could more than offset these fees.
Some lenders offer PMI-free loans for borrowers unable to make a 20% down payment, although these typically carry higher interest rates than conventional mortgages. You could also reduce or avoid PMI by making a larger down payment or applying for an 80-10-10 loan which uses two mortgages as one 20 percent down payment equivalent.
When can I get rid of it?
Most lenders require Private Mortgage Insurance (PMI), which protects them if you default on your loan. An insurer covers a percentage of their losses; and usually adds their premium into monthly payments. Unlike homeowner’s insurance policies which can be cancelled once equity reaches 20%, PMI cannot be cancelled once your home reaches this threshold.
But you have an option of asking your lender to cancel PMI before it happens – timing depends on lender requirements and home value trends; extra payments made directly towards principal can help to speed the process along.
Make your own appraisal to assess if there’s enough equity in your home to stop paying premiums using Experian’s home value estimate tool; getting started for free. Refinancing could also be an option, provided a lower interest rate is secured and there’s enough equity for qualification purposes; but this move can often prove costly; sometimes just switching over is worth considering instead.