What does Private Mortgage Insurance do and How much does it Cost?

Lender’s use the loan-to-value (LTV) ratio to limit the risk they take on when financing a property. The lender typically finances 80% of the value of the property, when it comes down to the value of the property, and the borrower would come up with 20% down payment.

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What does Private Mortgage Insurance do?

Private Mortgage Insurance covers the lender in the event that the borrower defaults. The reason the borrower has to pay for it, though it doesn’t protect them, is the simple fact that the lender took a risk, greater than 80% of the purchase price/ appraised value. The borrower is basically ensuring that the lender feels secure in covering more than 80% of the risk.

Do I need PMI?

From our last statement, you have already gathered that PMI Insurance is typically needed if you are not able to provide 20% down payment on the home.

It’s pretty important to note here that Private Mortgage Insurance (PMI) may also be used in the event the appraisal came in low and the bank needs the insurance to protect them from the additional risk.

How much does Private Mortgage Insurance Cost?

PMI is an additional expense at the end of the month, it can cost you anywhere from 0.25% to 2% of your loan balance per year. This is dependent on the size of the down payment and mortgage, the borrower’s credit score and the loan term. The higher the risk, the higher the rate you’ll pay; the higher the property value/ purchase price, the higher the premium you’ll pay.

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How to get rid of Private Mortgage Insurance?

You might already be a bit frustrated at the thought of doing this, you may be thinking ‘does private mortgage insurance go away?’. Well, let us put your mind at ease, it does go away.

You are only required to pay your PMI until you have covered 22% of the value of the property; in other words, the lender is in the clear from the additional risk and so the PMI can be discontinued (the lender must cancel the PMI after the 22% has been reached). This is a provision that is written in the Homeowners Protection Act.

You may also opt to make bigger monthly payments, to get rid of the PMI before the time frame that the 22% would have been covered, had you been doing your regular payments.

How to avoid Private Mortgage Insurance? | The Residential Buyer

If you want to avoid paying PMI, then the easiest way to do that is just bring 20% down payment to closing. If you cannot do that, then consider paying the PMI, buying a less expensive home, or perhaps utilizing our Rent-to-Own program. We, at The Residential Buyer, can help with that.

Before you go, we’d just like to say, ‘Happy Labor Day’ (2021).

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