What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance (PMI) is a type of insurance that lenders require for conventional loans when the borrower makes a down payment of less than 20% of the purchase price. The purpose of PMI is to protect the lender in case the borrower defaults on the loan. The cost of PMI varies depending on the loan amount, credit score, and loan term.
PMI is usually paid monthly as part of the mortgage payment, and the cost can range from 0.3% to 1.5% of the original loan amount annually. For example, if the original loan amount is $200,000, the annual PMI cost could be between $600 and $3,000, depending on the PMI rate.
How to Calculate PMI Costs
To calculate PMI costs, you need to know the loan amount, loan term, and PMI rate. The PMI rate is usually expressed as a percentage of the original loan amount. For example, if the loan amount is $250,000 and the PMI rate is 0.5%, the annual PMI cost would be $1,250.
You can use a mortgage calculator or consult with a mortgage broker to determine the PMI costs and how they will affect your monthly mortgage payment. It's essential to factor in PMI costs when determining how much house you can afford.
Can You Remove PMI from Your Mortgage Payment?
Yes, you can remove PMI from your mortgage payment, but it depends on the type of loan and the loan terms. For conventional loans, you can request to cancel PMI when the loan balance falls below 80% of the original purchase price. You'll need to contact your lender and provide documentation to support your request.
For FHA loans, PMI is required for the life of the loan, unless you put down 10% or more as a down payment. In this case, you can cancel PMI after 11 years. It's essential to review your loan terms and consult with your lender to determine the best course of action.
How to Avoid PMI Costs
One way to avoid PMI costs is to make a down payment of 20% or more. This will eliminate the need for PMI, and you'll only need to pay your monthly mortgage payment, property taxes, and insurance.
Another option is to consider a piggyback loan, which involves taking out a second mortgage to cover part of the down payment. This can help you avoid PMI costs, but it may require a higher interest rate on the second mortgage.
Refinancing to Remove PMI
If you're currently paying PMI on your mortgage, you may be able to refinance to remove it. This involves taking out a new loan with a lower loan-to-value ratio, which can eliminate the need for PMI.
Refinancing can be a good option if interest rates have fallen since you originally took out the loan, or if your credit score has improved. However, you'll need to weigh the costs of refinancing against the potential savings from removing PMI.
Frequently Asked Questions
What is the average cost of PMI?
The average cost of PMI ranges from 0.3% to 1.5% of the original loan amount annually, depending on the loan terms and credit score.
Can I cancel PMI on an FHA loan?
For FHA loans, PMI is required for the life of the loan, unless you put down 10% or more as a down payment. In this case, you can cancel PMI after 11 years.
How do I request to cancel PMI?
To request to cancel PMI, contact your lender and provide documentation to support your request, such as an appraisal or proof of loan balance.
Can I avoid PMI with a larger down payment?
Yes, making a down payment of 20% or more can eliminate the need for PMI, as it reduces the loan-to-value ratio.
Is PMI tax-deductible?
PMI is tax-deductible, but only for loans originated after 2007 and for taxpayers who itemize their deductions.
Can I refinance to remove PMI?
Yes, refinancing to a new loan with a lower loan-to-value ratio can eliminate the need for PMI, but you'll need to weigh the costs of refinancing against the potential savings.