What Is PMI and Will You Need It?
Thinking about buying a home but don’t have a 20% down payment saved up? You’re not alone. And that’s where PMI may come into play.
PMI (Private Mortgage Insurance) is insurance that protects the lender, not you, if you’re unable to make your mortgage payments. In other words, it’s a safety net for the lender in case you miss a payment. It’s typically applied to any borrower, regardless of age or credit score, if they have less than a 20% down payment.
When do you have to pay PMI?
If you’re planning on making a down payment of less than 20%, you’ll probably need PMI. Most lenders require private mortgage insurance when the down payment is smaller because there’s more risk for them. The good news is that PMI makes it possible to buy a home sooner instead of waiting years to save a larger down payment.
How much does PMI cost?
PMI costs can vary based on factors such as:
- Your credit score
- The size of your down payment
- Your loan amount
In general, PMI typically costs between 0.2% and 2% of your loan amount per year. PMI is usually paid monthly as part of your mortgage payment.
How long does PMI last?
For most conventional loans, PMI isn’t permanent. You’ll generally pay PMI until you’ve built 20% equity in your home. Once you reach that threshold, PMI can usually be removed. Your mortgage loan officer can help you understand exactly when and how that happens.
The pros and cons of PMI
PMI can work in your favor if:
- You don’t have 20% saved but want to buy now
- You want to take advantage of lower interest rates
- You’d rather keep cash available for moving costs, repairs or emergencies
In many cases, PMI helps buyers achieve homeownership sooner while keeping their finances flexible. But there are a few trade-offs to keep in mind PMI increases your monthly mortgage payment and can take several years to reach 20% equity. Those costs can add up over time,
Looking for help with your down payment?
If saving for a down payment feels like the biggest hurdle, reach out and we’ll work with you to see how we can help you reduce how much cash you need upfront.
Need help deciding?
Every homebuyer’s situation is different. Our knowledgeable team can walk you through your mortgage options, including potential PMI costs, down payments and homebuyer assistance programs, so you can decide what’s best for your homeownership goals. Contact us today!
