Private Mortgage Insurance (PMI) makes it possible for homebuyers to purchase a house with less than 20% down.
If you’re thinking of taking out a conventional mortgage, but don’t have a 20% down payment, there’s good news for you: you can get a mortgage with less than 20% down.
It’s important to know, though, that private mortgage insurance (PMI) is often a requirement for homebuyers who are paying less than 20% down on a conventional loan. PMI essentially protects the lender, in case the buyer is unable to make their mortgage payment each month.
For many people, the cost of PMI is worth the benefits of owning a home. Understanding the costs associated with PMI will help homebuyers be prepared for their upcoming mortgage expenses.
So, how much does PMI cost? Fees vary, depending on the down payment amount and the homebuyer’s credit score. If you have a 15% down payment and an excellent credit score, for instance, your PMI costs will most likely be less than a homebuyer who has only a 5% down payment and an average credit score.
Typically, PMI fees range from 0.5 to 1.5% of the original loan amount, per year. So, for example, if you take out a $400,000 mortgage, your PMI costs may range from $2,000 to $6,000 per year (or roughly $167 to $500 per month). Most PMI is paid as a monthly premium by the borrower, but there are other options.
You may be thinking, “Why would I want to pay that?”
By buying a home soon, you can start building equity for your future. If you’re currently renting, your monthly rent payments don’t contribute to your own wealth. When you purchase a home, you can increase your equity over the years. So, even if you’re making a PMI payment each month, you’re still contributing to your own future (instead of paying your landlord’s mortgage). Plus, PMI can eventually be canceled — so it’s a temporary cost that won’t follow you for the entire life of your home loan.
At the end of the day, it’s all about weighing the pros and cons of PMI. Speaking with an experienced loan professional will help you learn more about your options. Regardless of your decision, it’s never too early to begin planning for homeownership.
