Private mortgage insurance (PMI) is insurance that protects your lender's investment if you fail to make your payments. This can be a costly expense on top of your monthly mortgage payment.
Whether you pay PMI has nothing to do with your credit score or payment history. Instead, it's tied to the amount you owe on your mortgage. If you owe more than 80% of your home's value, you will pay PMI. And once you have to pay it, you'll almost immediately begin asking how to stop paying PMI. Read on to learn about a few options you may have if you're looking to get rid of PMI.
In most cases, when you buy a home with a down payment of less than 20% of the purchase price, you have to pay private mortgage insurance. If your down payment gives you more than 20% equity, then congratulations. PMI probably won't be something you have to worry about.
Many homebuyers, however, can't afford to make that large of a down payment at the time of purchase. If this is your situation, don't stress. Make extra mortgage payments to the principle until you owe just 80% of your home value.
But your lender won't simply remove PMI when you hit the 20% equity mark. You have to ask, and the lender can say no -- for a while. A lender has to drop PMI when you reach 22% equity based on the original purchase price of the home (in other words, when you owe 78% of your home value).
You could also look for a loan that doesn't require PMI. Although most do, USDA and FHA loans require mortgage insurance instead of private mortgage insurance. A VA loan is another option if you meet the eligibility requirements.
If you're looking to ditch your monthly PMI payments, here are a few options:
“PMI can cost anywhere from 0.41% to 2.25% and is largely determined by your credit score, loan-to-value ratio, and debt-to-income (DTI) ratio,” according to Millionacres writer Liz Brumer-Smith.
That's not a small sum of money. If you borrow $225,000 and pay 1% in PMI, you will pay $187.50 per month for PMI. That's $2,250 a year.
In exchange for that cash, you get exactly nothing. Most homeowners would consider that a bad deal.
Make extra payments to get to 20% equity as fast as you can, and monitor whether home values go up in your area (you can get a rough view by looking at what similar homes sell for). Stay on top of these things, and you should be able to get rid of your PMI sooner rather than later.
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