When purchasing a home, especially with a conventional loan, you may encounter Private Mortgage Insurance (PMI). PMI is designed to protect lenders in case a borrower defaults on their loan. While it benefits the lender, understanding PMI is crucial for homebuyers, as it can impact your monthly mortgage payment.
What is PMI?
PMI is a type of insurance that borrowers are required to pay if they make a down payment of less than 20% on a conventional loan. It allows buyers to qualify for loans with a lower down payment, making homeownership more accessible.
How Does PMI Work?
PMI is usually added to your monthly mortgage payment until you reach 20% equity in your home. Once you’ve built up enough equity or reached 78% of your loan-to-value ratio (LTV), you can request to have PMI removed.
How Much Does PMI Cost?
The cost of PMI can vary, typically ranging from 0.3% to 1.5% of the original loan amount per year. This amount depends on several factors, including the loan type, down payment size, and your credit score.
How to Avoid PMI
Put 20% Down: The simplest way to avoid PMI is by making a down payment of at least 20%.
Piggyback Loans: Some borrowers use a second loan (like an 80/10/10 loan) to avoid PMI.
Shop Around: Lenders may offer different PMI rates, so it’s important to compare options.
While PMI can add to your mortgage costs, it also provides an opportunity to purchase a home sooner with a smaller down payment. It’s important to understand how PMI works so you can make an informed decision about your mortgage.
Share your thoughts and Let's connect! Monte Brown I The DFW Real Estate Guy I 214-335-1105 I monte@bsare.com
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