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What Is Private Mortgage Insurance?

Private Mortgage Insurance, or “PMI” for short, is the type of insurance that you may be required to pay with a mortgage loan.

PMI is typically required on a mortgage if you make a down payment that is less than 20% of the purchase price of the home. Similar to other types of mortgage insurance, PMI helps to protect the lender if you happen to stop making payment on the loan, not you. This isn’t like most other types of insurance policies that you take out – PMI protects the lender’s investment, not the borrower’s investment in the home.

How Private Mortgage Insurance Works

Private mortgage insurance is not homeowner’s insurance. PMI is an added insurance to help the lender be protected in the case that the borrower is unable to make the payments. If you do not put a 20% down payment when buying a house, a monthly fee will be added to your payment to cover this insurance. While this is not an ideal situation to have additional money go towards something other than the principal, it still allows you to purchase a home and start building equity.

You do not have to wait many years down the road when you have accumulated the necessary funds for a 20% down payment. Also, PMI is not permanent, once you have built up to that 20% equity amount on your home you can call your lender to remove PMI monthly additional charge. Don’t worry, if you forget to call – it will be automatically removed once you reach 78% of the original value of the home. It is recommended to call before that point as you may be paying unnecessarily for a certain amount of monthly payments.

How Much Does PMI Cost?

To understand how much PMI costs, we must ask the following question. What is the current private mortgage insurance rate? The average annual cost of PMI can range anywhere from 0.5% to 1.5% of the loan amount of the home.

With these rates on a loan of $200,000 (approximately the US average mortgage amount nationwide), you would pay $1,000 to $3,000 a year respectively. This would come out to an additional $83.33 to $250 per month cost for PMI.

These percentages can sometimes fall outside of that range due to several factors, so it may be best to discuss with your lender prior to agreeing on your mortgage deal. The following factors affect the cost of private mortgage insurance.

Down-payment Amount

The amount you put as a down payment impacts the amount of PMI you will have to pay, as well as the duration that you have to pay it for.

For example, if you place 5% as a down payment, you will have the remaining 15% to get to the required 20% equity before PMI can be removed. If you place 15% down, you only have 5% left to go before PMI is no longer a requirement.

Credit Score

Your credit score can have an impact on your amount of PMI you need to pay. This is one of the factors that lenders use to determine that your PMI range of 0.5% to 1.5%. The better your credit score is, the closer you get to that lower limit. Conversely, the lower your credit score is, the closer you will get to that upper limit.

Mortgage Loan Amount

The size of the loan can impact your private mortgage insurance amount since the percentage will scale with the amount you borrow for your original loan amount.

Example: If your loan is $100,000 compared to a $300,000 loan with a PMI of 1.5%, you could be looking at $1,500 annually compared to $4,500 annually. Monthly this could be a difference from $125 to $375.

Type Of Mortgage

The type of mortgage you have can impact your private mortgage insurance costs. It may cost more for an adjustable-rate mortgage as opposed to a fixed-rate mortgage. The PMI may be higher with an adjustable-rate mortgage since the rates can fluctuate on this type of mortgage, as opposed to a mortgage that has a fixed-rate.

How Can I Avoid Paying PMI?

There are factors that contribute to you paying for private mortgage insurance, that could possibly be in your control. You may be able to make decisions that could alleviate the need for PMI, such as paying a larger down payment, taking out multiple loans, or perhaps adjusting your expectations on a potential new home.

Pay The 20% Down-payment

Putting the 20% down is easier said than done. If everyone had the chance or the choice to place this amount of money as a down payment, there would be no need for PMI. Unfortunately, not everyone is in a situation where this can be afforded. It is recommended to try to get to that specific percentage, however, or as close to it as possible to lower the number of months you will need to pay for the insurance.

Purchase A Cheaper Home

It may be easier to come up with a 20% down payment if you are looking for something more within your budget. If you have $20,000 ready for a down payment, in theory you have enough to get a mortgage on a $100,000 property less PMI.

If you try to use that same down payment amount for a $200,000 property, you will only have a 10% down and therefore will be required to pay for private mortgage insurance.

When Can I Stop Paying PMI?

It is simple, once you have attained 20% equity with the principal mortgage value you are able to make a request to your lender to remove the PMI payment. As mentioned above, the lender will not automatically remove this additional payment until the principal value is at 78%. You should be cognizant of where you sit respectively to your equity percentage so that you can remove any additional payments as soon as you are able to.

Is PMI Tax Deductible?

The short answer is yes, currently, private mortgage insurance is tax-deductible. Congress has extended the tax deductions for mortgage insurance premiums until the end of 2020 currently. There is a stipulation however on the tax deduction qualification. Your insurance premiums are not able to be deducted if your adjusted gross income is more than $109,000 (if married but filing separately it is half of that – $54,500).

Private Mortgage Insurance: Why It Matters To You

Private mortgage insurance can help you get property sooner than would be otherwise possible, but it does add to your monthly mortgage payment. It is best to avoid this if you are able to, as this is a beneficial arrangement for the lender, not the borrower. There are ways to try to avoid paying PMI that should be utilized if possible.

If the methods are not achievable, you may qualify for tax breaks related to those payments, if you meet the income requirements. At the very least, PMI payments are not permanent, they will expire after you meet a certain equity threshold.

 

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This page last updated: March 21, 2022