What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance, commonly known as PMI, is a type of insurance that lenders require from homebuyers who make a down payment of less than 20% of the home’s purchase price. PMI protects the lender if the borrower defaults on the loan. Although PMI only applies to conventional loans and does not directly benefit the borrower, it enables many people to become homeowners sooner by reducing the down payment barrier.
How Does PMI Work?
When you buy a home with a conventional mortgage and make a down payment of less than 20%, your lender will require PMI. The cost of PMI varies based on the loan-to-value ratio (LTV) and the borrower’s credit score. Generally, PMI costs between 0.3% and 1.5% of the original loan amount per year.
PMI can be paid in several ways:
1. Monthly Premiums: This is the most common method, where the PMI premium is added to your monthly mortgage payment.
2. Upfront Premium: You can pay the entire premium at closing.
3. Combination: Some lenders offer a combination of upfront and monthly premiums.
When Can PMI Be Canceled?
PMI isn’t a permanent cost and, in most cases, can be removed at some point during the life of the loan. Generally, a borrower can request the cancellation of PMI once they reach 22 percent equity built into the home through things like paying down the mortgage or appreciation of the home’s value. In some situations, PMI may automatically be removed once the homeowner reaches a certain agreed upon equity threshold.
Benefits of PMI
1. Lower Down Payment: PMI may allow you to purchase a home using a conventional loan with a lower down payment, sometimes as low as 3% of the purchase price.
2. Homeownership Sooner: With PMI, you may be able to buy a home sooner than if you had to save for a 20% down payment.
Considerations Before Getting PMI
1. Cost: While PMI may allow you to buy a home with a smaller down payment, it does add to your monthly mortgage payment.
2. Credit Score Impact: Your credit score may affect the cost of PMI. Borrowers with higher credit scores typically pay lower PMI premiums.
3. Loan Type: PMI applies to conventional loans. Other loan types, like FHA loans, have their own mortgage insurance requirements.
Private Mortgage Insurance is a valuable tool for many homebuyers, potentially allowing them to achieve homeownership sooner with a smaller down payment. Understanding how PMI works, as well as its benefits and costs can help you make an informed decision when buying a home. If you have more questions about PMI or need guidance on your home loan options, our team at Supreme Lending is here to help.
At Supreme Lending, we recognize that navigating the mortgage landscape can be daunting, especially for first-time homebuyers. Our team of dedicated mortgage professionals is here to support you every step of the way. Whether purchasing your first home or refinancing your current one, we are committed to making the process as smooth and hassle-free as possible. Contact us today to start your home financing journey with confidence.