When you buy a home, whether it’s in Ellicott City, Catonsville or anywhere else, your lender will most likely want you to come up with 20 percent of the home’s purchase price as a down payment. If you don’t have that much cash to put down, you may need to buy private mortgage insurance, or PMI.
But what is PMI, how much does it cost, and how long do you have to pay for it? Check out this complete guide to private mortgage insurance so you know what you’re facing when you buy a home with less than 20 percent down.
The Complete Guide to Private Mortgage Insurance
If you’re like most people, you haven’t given private mortgage insurance much thought. But for millions of people all over the country, it’s a necessity. Check out this guide to PMI, and if you don’t see your question answered here, give us a call at 443-955-1227 – we can put you in touch with a lender who can help you.
What is Private Mortgage Insurance?
Private mortgage insurance is a type of insurance many lenders require borrowers to buy. This type of insurance protects the lender, not the buyer, in the event that the buyer defaults (fails to make payments on) the mortgage loan.
Who Gets the Money From PMI?
The mortgage insurance company gets the money from PMI. If you fail to make your payments and the lender has to take your house, the insurance company will pay the lender.
How Does Mortgage Insurance Work?
If you buy private mortgage insurance, you’ll pay a monthly premium to the insurer, and the coverage you’re paying for will pay a portion of your loan’s balance back to the lender if you walk away from your payments. Your lender will try to make up the rest of the balance by selling the home. Check out the section “How Much is PMI on a Loan, and How Much is PMI Monthly” below to get a ballpark idea of how much you’ll pay.
How Do I Avoid Private Mortgage Insurance?
The easiest way to avoid paying for private mortgage insurance is to come up with a 20 percent down payment on the home you’re buying. However, there are some other ways to avoid it, such as by using a VA loan, some types of USDA loans, or other loan products that offer government or other agency backing.
How Much is PMI on a Loan, and How Much is PMI Monthly?
PMI usually costs between 0.5 and 1 percent of the entire loan amount on an annual basis. However, it can vary – and it’s best to talk to multiple lenders to find out how much you’re likely to pay. Use this table to get a ballpark idea of what you’ll spend on PMI annually and monthly based on your loan amount.
|Loan Amount||Annual PMI Range||Monthly PMI Range|
|$100,000||$500 to $1,000||$42 to $83|
|$200,000||$1,000 to $2,000||$83 to $167|
|$300,000||$1,500 to $3,000||$125 to $250|
|$400,000||$2,000 to $4,000||$167 to $334|
|$500,000||$2,500 to $5,000||$209 to $416|
|$600,000||$3,000 to $6,000||$250 to $500|
|$700,000||$3,500 to $7,000||$292 to $584|
|$800,000||$4,000 to $8,000||$334 to $667|
|$900,000||$4,500 to $9,000||$375 to $750|
|$1,000,000||$5,000 to $10,000||$416 to $834|
Do You Ever Get PMI Money Back?
You don’t get PMI money back. It’s a lot like car insurance – you pay for it because you must, and because it will be there if you need it. However, it’s different from car insurance because if you default on your payments to your lender, your lender gets the money. You don’t get anything but a foreclosure on your credit report.
Is Private Mortgage Insurance Bad?
Many people wonder, “Is PMI a waste of money?” There’s no easy answer to this question – it’s just that for some people, it’s worth it. For others, it’s not. It’s not good, and it’s not bad; it’s simply an option you have when you want to buy a home. Here’s the bottom line: Some people won’t buy a house until they have a 20 percent down payment in the bank because they don’t want to pay for PMI. However, during that time, they’re renting rather than building equity. On the other hand, PMI can be quite expensive. It’s up to you whether you think it’s worth buying a home before you have a 20 percent down payment.
How Long Do You Pay Private Mortgage Insurance?
Usually, you can stop paying for PMI once you’ve built up 20 percent equity in your home. You’ll want to check your lender’s terms before you sign anything! When you hit that magic number – 20 percent equity – you should call your lender and ask it to cancel your private mortgage insurance. When you have 22 percent equity, lenders are required to drop the private mortgage insurance requirement.
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