If you’re buying a home and you don’t have a 20 percent down payment, you’ll be charged something called PMI, or Private Mortgage Insurance.
Before you apply for a new mortgage, it’s important to ask your lender, “How much is PMI?” so you can factor that into your monthly payment.
Read on to learn more about Private Mortgage Insurance and what you can expect.
Why Do I Have to Pay PMI?
The purpose of PMI is to provide protection for the mortgage lender, not necessarily for you. This monthly premium is factored into your mortgage payment. It covers a portion of the balance due if you end up defaulting on your loan.
Even with Private Mortgage Insurance, you can still face foreclosure if you don’t pay your mortgage on time. It also will not protect you from a hit to your credit or keep your score from lowering.
In a nutshell, PMI is really for the lender’s benefit and doesn’t do much to protect you. Without at least 20 percent equity upfront, the lender is assuming more risk. However, if you do put 20 percent down on your home, you can avoid paying PMI.
Conventional mortgages allow you to remove PMI once your home reaches 80 percent equity. FHA loans, however, require PMI for the life of the mortgage regardless of how much equity you’ve gained.
How Much Is PMI Going to Cost Me?
The rate of PMI can be as low as 0.55% to up to 2.25% of your loan amount. The amount that you pay really depends on several factors, and you can talk to a broker like Linda Ching for more information.
When you ask, “How much is PMI,” the monthly cost depends on the size of the loan, your down payment amount, and your credit score. The bigger your mortgage loan, the more your PMI will cost.
Borrowers with good credit scores tend to pay less in PMI each month since they’re considered lower risk. And, even if you don’t have 20 percent to put down, your PMI should still be lower if you contribute 15 percent as opposed to 5 percent.
Adjustable-rate mortgages will have a higher PMI cost than fixed-rate mortgages. It’s important to try and get an estimate of how much your PMI will be before you buy a home so you can factor it into your budget.
Once your lender determines the cost of your PMI, the premium is added to your total monthly mortgage payment. It should be listed separately on your statement so you know exactly what you’re paying as part of your total cost.
Understanding Your Mortgage
From principal and interest to insurance, asking “How much is PMI?” upfront will help you budget your new home purchase. If you have 20 percent to use as a down payment, you can avoid PMI completely.
If you’re still unsure about your home loan budget, talk to your lender or a mortgage broker who can help you determine what you can afford.
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