If you’re using a mortgage loan to buy a home but you don’t have the cash to put 20 percent down, you’re most likely going to have to buy private mortgage insurance, or PMI.
But what is PMI, how much does it cost, and when can you stop paying it?
Here’s what you need to know.
Let's Talk About PMI
Private mortgage insurance is something that protects your lender if you default on your loan. That means if you don’t make your payments and walk away from your mortgage, the lender isn’t losing the full amount that you owe.
Who Has to Buy PMI?
Most people who put down less than 20 percent as a down payment on a mortgage loan have to buy PMI. It doesn’t apply to some types of loans, such as VA loans, but there are two types: private and government. If you take out a government-backed loan (other than a VA loan), you’ll pay your PMI to the government. Otherwise, you’re paying it to a private company.
How Much Does PMI Cost?
You can expect your private mortgage insurance payment to be about 0.3 to 1.15 percent of your total home loan. Usually, you pay it in installments to the lender - but sometimes you can pay it all up-front.
When Can You Stop Paying PMI?
You can usually stop paying PMI when you reach 20 percent equity in your home. That means if you’re buying a $100,000 home with nothing down, once your principal is down to $80,000, you can talk to your lender about cancelling it. Once you have 22 percent equity in your home, the lender is required to automatically cancel the coverage.
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