Private Mortgage Insurance or PMI can be a very boring and complicated concept to grasp… so we scoured the web and came up with a simple breakdown to help you.
What exactly is private mortgage insurance?
PMI is an insurance policy that you, the borrower, pays for. It ensures the lender in case of borrower default (not making your payments). If you put less than 20% down on a home, you are required to have private mortgage insurance.
Pros of PMI
Private mortgage insurance on the whole gets a bad reputation, but this is not necessarily warranted. PMI affords you the opportunity to buy a home with less than 20% down, so in that sense, it certainly opens many opportunities for homeownership. The national average is about 10%, but you can get into a home with just 3%.How do you pay PMI and how much does it cost?
PMI is included in your monthly mortgage payment. Your lender charges you one monthly housing expense and then sends the premium to the borrower. The average annual cost of PMI typically ranges from 0.55% to 2.25% of the original loan amount. For example -for a $300k mortgage, PMI would range from$1,650 to $6,750 per year or approximately $137.50 to $562.50 per month.
Your credit score also affects how much PMI will cost you. A borrower with a higher credit score would pay a lower monthly premium for PMI, than a borrower with a lower credit score.You can stop paying PMI once your mortgage principal balance is less than 80% of the original appraised value or the current market value of your home, whichever is less.
