Understanding PMI: What Is Private Mortgage Insurance?
Private Mortgage Insurance (PMI) can help you secure a mortgage, but what is it? In this article, we'll answer your PMI questions with an in-depth look at what it is, how it works and when it's required.
Understanding PMI: What Is Private Mortgage Insurance?
For many homebuyers, understanding Private Mortgage Insurance (PMI) and its implications on monthly payments and long-term costs can be confusing. It's important to know what PMI is and how it affects you when considering purchasing a home.
What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance, or PMI, is a type of insurance coverage homeowners are required to carry when taking out a mortgage loan and making a down payment of less than 20%. The goal of PMI is to protect the lender from potential losses if the borrower defaults on the loan. PMI is typically required for home purchases that are not backed by a government-sponsored program such as FHA loans.
How Much Does Private Mortgage Insurance Cost?
PMI costs vary based on the loan terms and the amount of the down payment. Generally, you can expect to pay between 0.3% and 1.5% of the loan amount annually for PMI. On a $200,000 loan with 10% down, PMI would cost about $160 per month or $1,920 per year. Keep in mind that PMI is an additional cost on top of the monthly mortgage payment and other associated costs of homeownership.
How Long Do You Have to Pay Private Mortgage Insurance?
The amount of time you are required to pay PMI varies from lender to lender, but it typically lasts until you either reach the point where you have 20% equity in the home or you refinance and obtain a new loan that does not require PMI. The amount you pay in PMI is also tax deductible in some circumstances. Be sure to consult a tax advisor for details.
The Bottom Line
Private mortgage insurance is an additional cost to consider when taking out a home loan, but it can also provide financial protection for lenders and peace of mind for borrowers. Understanding PMI and the associated costs can help you make an informed and financially responsible decision when buying a home.