Private Mortgage Insurance: Everything You Need to Know
At some point in your life, you may find yourself in need of a mortgage. In 2023, that isn't something a lot of people are saying!
However, obtaining a mortgage typically requires a down payment of at least 20%. Not everyone can afford such a significant sum, so many people turn to Private Mortgage Insurance (PMI) to help them get the loan they need.
In this article, we'll dive deep into the topic of PMI, including what it is, how it works, whether you can avoid it, and whether it's worth paying for.
What is Private Mortgage Insurance?
PrivateMortgage Insurance (PMI) is a type of insurance that lenders require when a borrower has a down payment of less than 20% of the home's purchase price. There are ways to avoid it, but we will get to that later. PMI protects the lender in the event that the borrower defaults on their mortgage payments. It is insurance for the bank, but you have to foot the bill.
Lenders view borrowers with less than a 20% down payment as higher-risk borrowers because they have less equity in their home. PMI helps reduce the lender's risk by covering a portion of the mortgage balance if the borrower defaults on their loan. It is a necessary evil for banks to put in place so they are protected.
How Does Private Mortgage Insurance Work?
When a borrower is required to have PMI, they must pay an additional monthly fee on top of their mortgage payment. The amount of PMI a borrower pays depends on the size of the down payment, the type of mortgage, and the loan-to-value ratio (LTV).
PMI is typically a percentage of the mortgage amount and ranges from 0.3% to 1.5% of the original loan amount per year. The borrower must continue to pay PMI until they have paid down their mortgage balance to at least 80% of the home's original appraised value.
Is There a Way to Avoid Private Mortgage Insurance?
If you're looking to avoid PMI, you have a few options:
Save for a larger down payment: By saving for a larger down payment, you can reduce the amount you need to borrow and potentially avoid PMI altogether.
Consider a piggyback loan: A piggyback loan is a second mortgage that is taken out at the same time as the private mortgage. This loan is used to cover a portion of the home's purchase price and can help borrowers avoid PMI.
Look for lenders that offer lender-paid mortgage insurance: Some lenders offer a program where they pay for the PMI on behalf of the borrower. In return, the lender charges a slightly higher interest rate on the mortgage.
Refinance your mortgage if your home value has increased. If you originally got a mortgage on your home and now rates have decreased it may be time to refinance. At this time you can ask to have your home appraised. If you have 20% equity after having paid down some of the mortgages and gained equity via the home value increase you may be able to eliminate PMI.
Is Private Mortgage Insurance Worth Paying Sometimes?
PMI can be worth paying in some cases, particularly if you're unable to save for a larger down payment. PMI allows borrowers to obtain a mortgage with a smaller down payment, which can be especially beneficial in hot real estate markets where home prices are rising quickly.
However, PMI can also be expensive and add to the overall cost of the mortgage. It's important to weigh the pros and cons of paying PMI before deciding whether it's worth it for you.
Private Mortgage Insurance Calculator and Rates
To get an idea of how much PMI will cost you, you can use a PMI calculator. The PMI calculator will take into account your down payment, mortgage amount, and other factors to estimate your monthly PMI payment.
PMI rates vary depending on the size of the down payment, the type of mortgage, and the loan-to-value ratio (LTV). Typically, the smaller your down payment and the higher your LTV, the higher your PMI rate will be.
Conclusion
Private Mortgage Insurance (PMI) is a type of insurance that lenders require when a borrower has a down payment of less than 20% of the home's purchase price. Avoiding this can be beneficial for some and not so much for others. Evaluate your situation and hopefully the information you find here at The Saving Dude will help you make a well-informed decision.