One of the most important decisions when purchasing a home is deciding how much money to put down. If you can’t save up a hefty down payment, you may still have options thanks to private mortgage insurance (PMI). For many homebuyers, the concept of PMI is confusing and intimidating. This guide aims to help you understand PMI, its purpose, and how it impacts your home-buying journey.
What is PMI, and Why is it Necessary?
Private mortgage insurance is typically required when homebuyers make a down payment of less than 20 percent. Having a low down payment makes you a higher-risk borrower, and PMI helps lenders mitigate this risk by providing them with insurance coverage in case you default on your loan. In short, PMI allows buyers to break into the real estate market with a smaller down payment while protecting lenders from financial loss.
How is PMI Calculated?
PMI rates typically range from 0.3 to 1.5 percent of the original loan amount per year. The rate you receive depends on your down payment size, mortgage type, loan-to-value ratio (LTV), and credit score. In general, the higher your down payment and credit score, the lower your rate.
Types of PMI
You have a few types of PMI to choose from, including:
- Borrower-paid mortgage insurance (BPMI): You pay the BPMI premium as part of your monthly mortgage payment. You can request to have the private mortgage insurance removed once you pay down your mortgage to 80 percent.
- Lender-paid mortgage insurance (LPMI): The lender pays the PMI premium on your behalf. In exchange, you may have a higher mortgage interest rate. LPMI cannot be removed and will last for the entirety of the mortgage term.
- Single-premium mortgage insurance (SPMI): You pay the entire PMI premium upfront in a lump sum, either in cash or by financing it into the mortgage. This eliminates the need for monthly PMI premiums and may result in lower mortgage payments.
How to Avoid or Remove PMI
To avoid PMI entirely, save up a 20 percent down payment before buying a house. You can also avoid PMI if you qualify for certain government-backed mortgages, including:
- VA loans for eligible veterans and active-duty military personnel
- USDA loans for homebuyers in rural and suburban areas who meet specific income requirements
- FHA loans for borrowers with lower credit scores and smaller down payments
If you don’t qualify for these mortgage types, you may need PMI to buy a house with less than 20 percent down. Then, follow these tips to have PMI removed as quickly as possible:
- Make consistent, on-time mortgage payments to build equity faster, lower your LTV ratio, and allow you to remove PMI once it reaches 80 percent.
- Refinance your mortgage if your home has appreciated in valueto eliminate PMI. You might even qualify for a lower interest rate, saving you even more.
- Remodel your home to increase its value and contribute to a lower LTV ratio, allowing you to remove PMI.
At Vutech | Ruff, Cutler Real Estate, our experienced agents are here to educate you about the home-buying process. We have extensive knowledge of the Ohio real estate market and provide valuable resources to help you navigate its complexities. For personalized assistance and guidance when buying a home in Columbus, OH, please call our real estate office at 614-897-0618 today.