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Buying a home is exciting but let’s be honest, keeping your monthly costs as low as possible is just as important. One expense that could be part of your mortgage payment is private mortgage insurance (PMI). Whether you’ll need to pay for it depends on your down payment, and understanding how it works can help you plan ahead.
What Is Mortgage Insurance?
Your monthly mortgage payment usually includes principal, interest, taxes, and homeowner’s insurance (PITI). But if you’re putting down less than 20%, mortgage insurance will likely be required, resulting in an extra fee.
So, what does it do? Mortgage insurance protects your lender in case you can’t make your payments. While it adds to your monthly expenses, it also makes homeownership possible for buyers who don’t have a large down payment saved up. The good news is that it’s not permanent!
Is Mortgage Insurance Required?
If you’re trying to keep your monthly mortgage payment as low as possible, knowing whether you’ll need to budget for mortgage insurance is key. Ultimately, it will depend on your loan type and down payment:
- Conventional Loans: PMI is required if you put down less than 20%. However, you can request to remove it once you reach 20% equity.
- FHA Loans: These require a mortgage insurance premium (MIP) no matter how much you put down, but the terms vary.
- VA Loans: While PMI, is not required, a one-time funding fee will apply.
- USDA Loans: No PMI, but upfront and annual fees are required.
If you’re unsure whether mortgage insurance applies to your loan, don’t worry! Your loan officer can help you explore options that fit your budget and financial goals.
How Much Is Mortgage Insurance?
If putting down 20% isn’t possible, that’s okay! Mortgage insurance won’t last forever, and knowing how much it costs can help you budget smartly.
- Conventional Loans: 0.1% – 2% of the loan amount annually.
- FHA Loans:
- Upfront MIP: 1.75% of the loan amount (can be rolled into your loan).
- Annual MIP: 0.15% – 0.75%, depending on loan term and down payment.
To provide an example, let’s say you’re buying a $500,000 home with a 10% down payment ($50,000), your loan would be $450,000. With a PMI rate of 0.5%, your annual mortgage insurance would be about $2,250 ($450,000 × 0.005). That means you’d pay around $188 per month until you reach 20% equity, at which point you can request to remove PMI.
How to Get Rid of Mortgage Insurance
If you’re paying mortgage insurance, chances are you want it gone as soon as possible. While the simplest way to avoid it is to put down 20% upfront, that’s not always realistic. Here are other ways to eliminate it faster:
- Refinance Your Loan: If your home’s value has increased, refinancing into a new loan could remove PMI.
- Make Home Improvements: Upgrading your home may boost its value, helping you reach 20% equity sooner.
- Request a New Appraisal: If your home has appreciated, an updated appraisal might prove you’ve hit the 20% mark.
- Use a Second Mortgage: A home equity loan or HELOC can help you reach 20% equity at closing and avoid PMI.
- Request PMI Cancellation: Once your loan balance is 80% of your home’s value, you can ask your lender to remove PMI.
Most homeowners either wait until they reach 20% equity or refinance once their home’s value increases to drop mortgage insurance.
Is Mortgage Insurance a Dealbreaker?
Not at all! While mortgage insurance is an extra cost, it shouldn’t stop you from buying a home. In fact, many buyers use it as a stepping stone,, allowing them to purchase a home sooner rather than waiting years to save a larger down payment.
It’s all about understanding your options, working with a trusted lender like RWM Home Loans, and finding the best fit for your budget. If you plan ahead with one of these methods, PMI won’t be a long-term burden.
- Factor it into your budget: Make sure your estimated monthly mortgage payment (including PMI) fits comfortably into your financial plan.
- Save extra funds: If possible, set aside extra payments to help you hit 20% equity faster.
- Explore different loan programs: Some loans, like VA and USDA loans, don’t require mortgage insurance at all.
Buy a Home on Your Terms
Mortgage insurance is just one piece of the homebuying puzzle, and the good news is it won’t last forever! By knowing what to expect and how to plan, you can make informed decisions that help you save money in the long run. We know that affordability is a challenge in today’s market, and we’re here to help. If you’re wondering how much home you can afford, let’s crunch the numbers together and explore your best options!
