If you are in the market for a home, you have likely heard the term “private mortgage insurance” or PMI. Put simply, private mortgage insurance is the coverage required by conventional lenders for homeowners who make a down payment of less than 20% of the home’s purchase price. The majority of lenders require PMI for conventional mortgages if the down payment is less than 20%. Most government-backed loans are subject to private mortgage insurance as well.
The purpose of PMI coverage is to offer lenders protection in the event the homeowner defaults on their loan. Private mortgage insurance also gives home buyers the chance to become a homeowner even if they cannot come up with 20% for the down payment.
How Private Mortgage Insurance Works
If you are required to pay PMI, your lender will set it up through a private insurance provider. Rest assured, they will give you all of the pertinent details and explain how private mortgage insurance works in advance of the loan closing such as:
- The cost of your policy
- Your annual premium
- When your insurance coverage obligation will end
Keep in mind that you will need to pay your annual premium upfront – either the entire amount for the year or the first monthly payment – in order to secure your coverage.
The Average Cost Of Private Mortgage Insurance
On average, private mortgage insurance premiums range between 0.55% and 2.25% of the original loan amount. A $200,000 mortgage would cost $1,100 to $4,500 annually and $91.66 to $375 monthly.
The premium is heavily influenced by your loan-to-value ratio and credit score. A higher loan-to-value ratio equals a higher insurance rate. Conversely, the better your credit score, the lower your rate.
Making Your PMI Payments
In most cases, you can pay a lump sum annually. This arrangement is referred to as single-payment mortgage insurance. The drawback is, you may not be entitled to a refund if you move or refinance.
Many buyers opt to roll their premium into their mortgage payment so they can pay it on a monthly basis. Alternatively, you can pay part of your premium upfront and break the remaining balance into monthly payments. These two options are part of how private mortgage insurance works.
Talk to your lender about which payment arrangement is best for your situation. They can calculate costs for you to get exact figures.
Tips For Choosing The Best Lender
When it comes to deciding on a lender, make sure you carefully weigh all of your best options. It is a good practice to get offers from a minimum of three lenders.
If you want to avoid paying private mortgage insurance, you can go one of two routes: buy a less expensive home so you can put 20% down or wait to buy a home until you can pay 20%.
Conventional loans are most often subject to private mortgage insurance. Look at less conventional loans such as VA and FHA that may not require this coverage.
Save Money On Your Private Mortgage Insurance
As an independent insurance agency, Compass Insurance Agency is not obligated to recommend one insurance provider over another. Therefore, we are free to find the best, most affordable provider of the numerous top insurance carriers we work with. We compare 16 home and auto insurance company quotes including:
- Nationwide Insurance
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You do not have to pay a fortune for private mortgage insurance. Let us do all the legwork for you, just fill out our short form and a licensed agent will start comparing homeowners insurance quotes right away!