What Is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance (also referred to as mortgage protection insurance on the West Coast) is a costly insurance premium that the borrower pays to protect the lender in case he defaults on the loan. As part of the loan qualifications set out by Fannie Mae and most secondary market investors, a borrower is required to pay private mortgage insurance (PMI) when they don’t put down at least 20% of the home’s purchase price as a down payment. But with the right loan, it doesn’t have to be an obstacle. In fact, your home lender may allow you to buy it down, just like points buy down a mortgage.
Just How Costly Is Private Mortgage Insurance?
Mortgage protection insurance increases your monthly payment and may be tax-deductible (please check with your tax advisor). The cost of private mortgage insurance varies, but generally it calculates to about one-half percent of the total loan amount. Let’s say you buy a home for $200,000 and put 5% down or $10,000. The annual cost of PMI on your $190,000 mortgage might run $950 a year, adding an extra $80 to your mortgage payment each month. However, this doesn’t necessarily mean your payment will be $80 cheaper if you can avoid PMI.
How Can I Avoid Paying PMI?
If your home lender doesn’t offer any options to avoid paying PMI, there are other ways to help you avoid it.
- You could buy a home that allows you to pay for the 20% down payment. In other words, buy a less expensive home.
- Borrow the 20% down payment from family or friends.
- If you already own a home, you could get your home appraised in order to show your mortgage lender that you have over 20% of equity in your home and you don’t need to pay the PMI anymore.
- If you already own a home, refinance your mortgage in order to get rid of the PMI and get a lower mortgage interest rate.
At Quicken Loans, you can actually eliminate your insurance with our PMI Buster Option. By paying a slightly higher rate, you can avoid paying PMI for as long as you decide to keep your loan and Quicken Loans will pay your PMI to the mortgage insurance company so you don’t have to worry about it.
Learn More About How You Can Avoid PMI
If you’re buying a home with less than a 20% down payment, call 800-251-9080 to talk to a home loan expert and help you chose the best loan.
Interested in buying a home with a low down payment? Find out more by reading our article about No and Low Down Payment Loans.