Usually, PMI costs around $30-$70 per month for every $100,000 you borrow, according to Zillow. Most people want to avoid PMI because it's an unnecessary cost that doesn't provide them any value as the homeowner.
Mortgage Broker here. 20% gets you out of PMI. PMI payment is based largely on credit score and down payment, so if you have low-ish credit, then you definitely made the right call. Putting a big down payment versus not is totally a preference of having more liquidity versus a lower payment.
Cons of PMI
The cost of the PMI payments is added to your monthly mortgage payments. Depending on the size of the down payment, loan term, and buyer's credit score, the cost of PMI can vary. This results in higher monthly costs until the PMI is removed.
PMI is arranged by the lender and provided by private insurance companies. It insures the lender against loss caused by borrowers failing to make loan payments. Make no mistake: If you fall behind on your mortgage payments, PMI does not protect you and you can still lose your home through foreclosure.
Key Takeaways. Private mortgage insurance (PMI) can be an expensive requirement for getting a home loan. PMI is likely to be required on mortgages with a loan-to-value ratio (LTV) greater than 80%. Avoiding PMI can cut down on your monthly payments and make your home more affordable.
Your mortgage lender will determine the PMI rate and multiply the percentage by the loan balance. For example, if the PMI rate is 0.5% and your loan amount is $300,000, your PMI will cost $1,500 annually or $125 monthly.
The Bottom Line: Removing PMI Can Help Ease Your Financial Burden. Mortgage insurance gives many home buyers the option to pay a smaller amount upfront for their downpayment. However, it increases the monthly payment until you're able to remove it.
You'll pay PMI until you've reached 20 percent equity in your home, or an 80 percent loan-to-value (LTV) ratio on your mortgage.
Is mortgage insurance tax-deductible? No, private mortgage insurance isn't tax-deductible now. The mortgage insurance deduction was only available for eligible homeowners for the 2018–2021 tax years.
The amount you will need depends on the type of loan you choose. A typical 20 percent down payment on a $300,000 purchase would be $60,000. The National Association of Realtors estimates the median down payment percentage in America to be 14 percent, and that would be $42,000.
PMI can add hundreds of dollars to your monthly payment – but you don't need it forever. You can often request PMI removal once you own 20% equity in your home. And lenders generally must drop PMI automatically when your loan-to-value ratio (LTV) hits 78%.
Even though interest rates are still high, it's a great time to buy a house. The higher interest rates have priced some buyers out of the market, which means you could face less competition when you make offers. Plus, if interest rates do eventually go down significantly, you can always refinance to get the lower rate.
If you can afford it, putting 20% down on a house is ideal. It helps you avoid private mortgage insurance (PMI), reduces your loan amount, and lowers monthly payments.
If you have less than a 20% down payment when you purchase a home, you most likely will be required to purchase private mortgage insurance or PMI. PMI protects the lender on a conventional mortgage in the event the borrower defaults and the lender forecloses on the property.
The PMI fee goes toward insurance coverage that protects your lender—not you—in case you can't make monthly payments and default on your loan. Your lender then can foreclose your house and auction it off to earn back the money they loaned you. At a foreclosure auction, lenders can recover about 80% of a home's value.
They can increase your monthly expenses and make it harder to qualify for a loan. So it's no wonder that everyone wants to avoid PMI when they buy a home. But that's not the whole story. In fact, savvy homebuyers and investors use PMI to make money.
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Many lenders (like Fannie Mae) also require a two-year “seasoning requirement,” meaning you can't have PMI removed until you've made two years' worth of on-time payments—even if your equity has grown above 20%. If it's been less than five years, you might even be required to have 25% worth of equity.
The typical down payment on a house for a first-time buyer is about 8% of the home price, while repeat buyers typically put down 19% of the purchase price, according to data available from the National Association of REALTORS® in late 2023.
Disadvantages. PMI is designed to protect the lender, not the borrower. That said, PMI does not reduce the risk of foreclosure if a borrower falls behind on mortgage payments. PMI also increases your monthly mortgage payments, leaving you with less disposable income.
Private mortgage insurance enables borrowers to gain access to the housing market more quickly, by allowing down payments of less than 20%, and it protects lenders against loss if a borrower defaults.
You can avoid paying PMI by providing a down payment of more than 20% when you take out a mortgage. Mortgages with down payments of less than 20% will require PMI until you build up a loan-to-value ratio of at least 80%. You can also avoid paying PMI by using two mortgages, or a piggyback second mortgage.
PMI will cost less if you have a higher credit score. Generally you'll see the lowest PMI rates for a credit score of 760 or above.
Unlike the principal of your loan, your PMI payment doesn't go into building equity in your home. It's not money you can recoup with the sale of the house, it doesn't do anything for your loan balance, and it's not tax-deductible like your mortgage interest.
Upfront premium: Rather than paying every month, you may have the option to pay the full cost at once. This is single-premium PMI. In this case, your lender arranges for you to pay PMI when you close on the loan. While it's an additional closing cost, your monthly mortgage payment will be lower.