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- Private mortgage insurance protects your lender should you default on your mortgage payments.
- PMI is required for homebuyers who pay less than 20% of the purchase price up front and get a conventional mortgage.
- Mortgage insurance can cost anywhere from 0.2% to 2% of the loan's principal balance, and is commonly paid to the lender as part of your monthly mortgage payment.
- Once you reach 20% equity, you can apply to have mortgage insurance removed from your monthly payments.
- Policygenius can help you compare homeowner's insurance policies to find the right coverage for you, at the right price »
There are plenty of ways to buy a home even if you don't have 20% for a down payment.
A conventional mortgage only requires a 10% down payment, and you only need 3% if your mortgage is backed by government-sponsored mortgage companies Fannie Mae or Freddie Mac.
But while a smaller down payment can help first-time buyers get in the door, it comes at an extra cost. In addition to higher monthly payments from a bigger mortgage, buyers who put down less than 20% of the purchase price and take on a conventional loan — i.e. not a governmental housing loan — must pay for private mortgage insurance.
What is private mortgage insurance?
While homeowners insurance protects you and your home, PMI protects the lender should you stop making your mortgage payments.
You'll need PMI if you have less than 20% for a down payment on a conventional mortgage because a lower down payment means the lender considers you to be a greater risk. PMI helps offset that risk.
How much does private mortgage insurance cost?
The exact cost of PMI is detailed in the loan estimate, but it can range from 0.2% and 2% of your mortgage amount, according to insurance-comparison website Policygenius. Put another way, homeowners can expect to pay $200 to $2,000 for every $100,000 you borrow.
The PMI rate depends on your credit score and loan repayment terms. A higher credit score may yield a lower insurance payment, as it signifies to the lender that the borrower is responsible in making on-time debt payments. According to Policygenius, the monthly amount should remain fixed over the life of the loan, or as long as the borrower is required to pay.
There are four PMI payment method options. Most commonly, the cost of mortgage insurance is tacked on to the monthly mortgage payments — along with property taxes and homeowners insurance — and paid to the lender.
The homebuyer can pay the lump-sum insurance payment up front, though oftentimes it's better to just put the money toward the down payment; pay part of the insurance payment up front, and part of it through monthly payments; or opt for a higher interest rate if the lender pays for the insurance up front.
How long do you pay private mortgage insurance?
Assuming you opt to pay your PMI monthly, you may contact the lender once you have gained 20% equity in your home to ask to cancel PMI. The lender isn't guaranteed to approve this request, though.
Even if your request is denied, the lender is legally required to cancel PMI once you've obtained 22% equity in your home.
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