Private mortgage insurance (PMI) is often required by lenders when borrowers make a down payment of less than 20% on a conventional mortgage loan. PMI protects the lender in case the borrower defaults on the loan. Here’s what you need to know about PMI:
When Is PMI Required?
PMI is typically required when the down payment on a conventional mortgage is less than 20% of the home’s purchase price or appraised value, whichever is lower. Lenders may also require PMI if the borrower’s credit score is below a certain threshold.
How Much Does PMI Cost?
The cost of PMI varies depending on factors such as the loan amount, down payment, credit score, and loan term. PMI premiums are typically paid monthly and can range from 0.3% to 1.5% of the original loan amount annually.
Strategies to Avoid Paying PMI
There are several strategies to avoid paying PMI:
- Make a Larger Down Payment: Making a down payment of 20% or more eliminates the need for PMI.
- Consider a Piggyback Loan: A piggyback loan, also known as an 80-10-10 or 80-15-5 loan, involves taking out a second mortgage to cover part of the down payment, allowing you to avoid PMI.
- Look for Lender-Paid PMI: Some lenders offer lender-paid PMI options, where the lender pays the PMI premium in exchange for a higher interest rate on the loan.
- Refinance: Once you have built sufficient equity in your home, you may be able to refinance to a loan without PMI.
Conclusion
While PMI can increase the cost of homeownership, it allows borrowers to purchase a home with a smaller down payment. By understanding when PMI is required, how much it costs, and strategies to avoid paying PMI, borrowers can make informed decisions about their mortgage financing options.
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