What Is PMI And Will I Have to Pay It?
There are several costs that are associated with buying and owning a new home. One you might be less familiar may be the idea of PMI. What exactly is PMI and when might you need to worry about it?
Private mortgage insurance or PMI, refers to the special type of insurance that is required when your down payment is less than 20 percent of the total value of your home. If you default on your loan, PMI will pay off the outstanding balance of your mortgage, thus protecting your lender.
How much can you expect to pay for PMI each month? The actual amount usually varies based on the amount of your down payment as well as the amount of coverage required by your lender. Typically, PMI equates to half of one percent of your loan’s value. Therefore, if you take out a $200,000 home loan, you could reasonably expect your PMI to cost $1,000 per year. Divided over the course of twelve months, that would add approximately $83 per month to your mortgage payments.
That is certainly a significant increase, particularly for first-time homebuyers who may be concerned about making a mortgage payment each month. There are advantages to PMI, however. For instance, you may find that you are able to purchase a home with less of a down payment than might otherwise be possible. Paying PMI may also increase your chances of loan approval when the lender knows their investment is not at risk.
The good news is that while PMI will add to the cost of your mortgage each month, it does not have to be forever. You can usually eliminate the cost of private mortgage insurance once you have attained 20 percent equity in your home. That is certainly an incentive to work toward paying a little extra on the principal of your loan each month. Additionally, if you happen to live in an area where property values are on the rise, you have a better chance of reaching the desired 20 percent equity level within a shorter period of time. If you believe you have attained 20 percent equity in your home, it can be worth it to contact your lender. Be aware that the lender may request a new appraisal, however. This is a fee you may be responsible for paying. Get in touch with me at 817-690-0976 and I will be happy to answer any questions you may have about purchasing your new home.
Pam Snowden
Realty World Professionals
817-690-0976 (cell)
Photo by Avi Waxman on Unsplash
