PMI Fees Can Be Worth It
Fact: Private Mortgage Insurance (PMI) is required on most conventional mortgages with less than 20% down. This is a monthly fee that protects the bank in the event the borrower stops paying their premiums. For a $300,000 loan (which would be putting 5% down on a home worth about $315,000), the average cost of PMI is between $125-$375 a month ($1,500-$4,00 a year).
Fiction: Some buyers worry that the PMI on their loan will balloon their monthly payment extraordinarily, but this is rarely the case. When you consider that a monthly mortgage payment adds to your net worth each month through home equity, paying a little extra for PMI is often a no-brainer.
Every borrower has a different PMI rate, which is based on how much you put down, your credit score, and your debt-to-income ratio. Considering how much longer it would take most buyers to save the additional 15% to put down and how much home prices could continue to rise in that time, this is often a very worthwhile fee to take on! In the $315,000 home price example above, it would take almost ten years to save the extra 15% of a loan if you are saving that $400/month fee, and more than 31 years if you save $125/month. That is a lot of equity you have lost out on while waiting to get to 20%!
PMI is not a permanent fee for the life of the entire mortgage. Lenders must remove the fee when your loan reaches 78% of the home’s original value. However, borrowers can request the removal when their loan reaches 80% of the original value. Between rising home values and improvements made to the property, borrowers can increase home equity ahead of schedule. A real estate agent can help you determine if the comparable sales combined with home improvements have led to increased home values in your area, and if you should schedule an appraisal with your lender to try to get rid of your PMI early. If you want some help seeing if you can get rid of your PMI early, let me know!
FHA borrowers don’t have PMI, but they will have mortgage insurance premiums (MIP—which is a little too close of an acronym if you ask me). This is different because it lasts the entire life of the loan, or until you refinance into a conventional mortgage. Many borrowers do refinance into other loans to get rid of this fee, but today, where the majority of home owners have a sub-4% interest rate, paying MIP is likely less expensive than refinancing.
