Certain Homeowners Must Pay PMI Insurance—What It Means and How to Avoid It
In the midst of an ongoing housing boom in which home prices jumped 15 percent in the year ending in February, potential homeowners are trying to keep costs down. For many, this requires putting more money down, if only to avoid having to pay private mortgage insurance, or PMI.
Certain homeowners must pay PMI, depending on the type of loan and how much money they’re putting down. Here’s what it means and how to avoid it for one less expense.
Private mortgage insurance (PMI) required for people who pay less than 20 percent down
There’s a reason why people say most homeowners should pay at least 20 percent of the home’s cost in a down payment. If you have a conventional loan and pay less than 20 percent down (meaning you’re borrowing against more than 80 percent of the property in the mortgage), you usually have to pay PMI.
PMI is also required for people who refinance with less than 20-percent equity
If you’re refinancing a home and own less than 20 percent of the home’s purchase price, you will also most likely be required to pay PMI.
Whichever situation you’re in, a private insurance company provides the PMI and your mortgage lender will organize it and integrate the loan and insurance premium payments.
How much does PMI cost?
People who pay PMI may do so via a monthly premium, one-time payment up front, or a hybrid of the two. The specific payment terms depend on your lender.
If you’re paying PMI on a monthly basis, you’ll do so through your monthly mortgage payment. If you’re paying PMI up front in a single payment, you can get it out of the way early. However, you may not be eligible for premium refunds (the U.S. Department of Housing and Urban Development, or HUD, refunds some PMI premium payments for single-family homes).
As for how much money you can expect to pay, that depends on the loan amount you’re taking out. The average PMI premium is somewhere between 0.58–1.86 percent of the loan amount. The loan amount is the amount you’re financing (so if you pay any down payment, you can subtract it from the purchase price to get your projected loan amount).
How to avoid paying PMI
The most straightforward way to avoid paying PMI is by paying a down payment of at least 20 percent on your property. The cost of PMI can really add up, so it’s best to eliminate that expense with an upfront payment if you’re financially able to do so.
If your mortgage lender automatically triggers PMI because your home value increased, you may be able to request a cancellation. If you generate at least 20-percent equity in your home you already purchased, you can also refinance without PMI.
Federal programs, including VA loans that allow veteran home buyers to buy a home with no money down without the addition of PMI, may also be an escape from PMI premiums.