If you’re planning to purchase a home soon, speak with a loan expert about which mortgage insurance option would make the most sense for your finances. They can run scenarios to demonstrate how changing them could alter PMI costs.
Raising your credit score can help you qualify for lower mortgage insurance costs, potentially saving thousands each year in premiums. But there are other ways you can cut costs on PMI.
1. It’s a fee
PMI (Property Mortgage Insurance) is an additional monthly cost bundled into your mortgage payments that protects only the lender – not you and/or your property. Unlike homeowners insurance which covers damages to both, PMI provides coverage against lender risk only.
PMI costs typically range from 0.5%-1.25% of your loan balance each year depending on factors like credit score, down payment amount and loan-to-value ratio. You have two payment options for PMI: either one-time payment at closing, or making installment payments of part of it alongside your monthly mortgage payment as part of an ongoing agreement.
Private Mortgage Insurance (PMI) is required for conventional conforming loans that meet the guidelines established by Fannie Mae and Freddie Mac, the two government-sponsored enterprises which back most home loans. Government-backed loans such as FHA, USDA and VA mortgages do not require PMI; to avoid paying it altogether you could make a larger down payment or seek lender options that do not necessitate it such as piggyback mortgages with higher interest rates or alternative lender options that do not mandate PMI premiums.
2. It’s not insurance
Most conventional mortgages require private mortgage insurance (PMI), but there are ways to eliminate it. One effective strategy is making a 20% down payment that lowers your loan-to-value ratio below 80% (or 80% of original value in case of refinancing). You could also consider government-backed loans like an FHA or USDA loan which don’t incur PMI premiums.
Ask your lender about “lender-paid” PMI, which shifts its costs onto you via higher interest rates. However, this option is generally unavailable to first-time homebuyers as you typically only qualify if you lack access to larger down payments or suffer from bad credit – though even with this alternative it would still be prudent to save up for larger deposits to reduce PMI costs over time and always remember: PMI is not insurance but simply a fee in exchange for less risk being taken on by lenders.
3. It’s not forever
Private mortgage insurance may seem burdensome when budgeting for home ownership, but it serves an important function: It allows borrowers to purchase homes with lower down payments than would otherwise be possible, easing into homeownership much quicker.
Good news is, PMI won’t follow you forever. In most cases, it will automatically disappear once your loan balance drops below 80% of original property value; alternatively you may request removal earlier at an additional fee for appraisal services.
Federal law mandates lenders cancel PMI when a borrower reaches 20% equity, though you can request this be done earlier if desired. One way of meeting this goal may be making extra payments that go toward principal; you should consult your lender on this matter to help track this.
4. It’s not a good deal
If you want to purchase a home and want to forego paying Private Mortgage Insurance (PMI), there are a few strategies you can employ. One is making sure that you make at least 20% down payment on a conventional conforming loan (the kind Fannie Mae and Freddie Mac buy from lenders), which will automatically cancel PMI.
Another option is to request that your lender or mortgage servicer cancel PMI once certain milestones have been reached. Federal regulations stipulate that it must be cancelled when either you hit halfway point in your term or have obtained 20% equity in your home, whichever comes first.
Avoid PMI altogether by opting for government-backed loans like an FHA mortgage or one of Freddie Mac’s HomeReady loans, available to those with credit scores as low as 620. Both offer smaller down payments than conventional mortgages so that you can purchase your home sooner without incurring PMI costs.