PMI (Private Mortgage Insurance) is an important component of many mortgages. If you’re a first-time homebuyer, and you’re not expecting it, PMI may come as a bit of a surprise and might leave you wondering what exactly is PMI and what it will cost you. Keep reading to learn more about PMI, why it’s necessary, and how it affects your monthly mortgage payments.
What is PMI?
Private mortgage insurance is a type of insurance that protects the mortgage lender if the borrower defaults on their loan payments. PMI is usually required when you take out a conventional mortgage and make a down payment of less than 20% of the property’s purchase price. If you’re refinancing with a conventional loan and have less than 20% equity in your home, PMI is usually required then, as well.
PMI is an additional cost you pay to your lender, which is added into your regular monthly mortgage payments. The lender looks at your credit score and the loan’s LTV (loan-to-value) ratio—a measurement of the amount of the loan compared to the property’s price—and uses this information to determine how much you’ll need to pay in PMI each month. This gives the lender some extra protection if you end up unable to keep up with your mortgage payments.
How much does PMI cost?
The average annual cost of PMI varies based on many factors. There are PMI calculators you can use online to get an estimate of how much your private mortgage insurance may cost, based on home price, down payment, loan interest rate, mortgage insurance rate, and the term of the loan. And, of course, your exact PMI costs are outlined in your Closing Disclosure, which you review a few days before you close on your home loan.
Will I have to pay for PMI forever?
The good news is that PMI is not permanent. If you stay current on your mortgage payments, your lender is required to terminate your PMI once your principal loan balance hits 78% of your property’s original cost. The date when this will occur is provided in a PMI disclosure when you first take out your mortgage. You can meet these conditions even faster if you pay more towards your monthly mortgage payments to bring down your principal balance sooner.
You might be able to cancel your PMI if you have your home appraised and discover that your property is worth more now than it was when you bought it. If the higher home value now
gives you at least 20% equity in your home, you may be able to request that your lender terminate PMI, although you might need to meet additional requirements which vary between lenders. Be sure to read the fine print of your PMI agreement to properly understand how soon you can stop making payments.
Also, if you have at least 20% equity when you refinance your current mortgage, you will not need to pay PMI on your new loan.
Is PMI tax deductible?
While most Americans opt for standard tax deductions, if you choose to itemize your deductions, you can write off your PMI payments provided that you meet specific requirements. To claim PMI premiums in 2021, your PMI must have been issued after 2006, and your adjusted gross income must be lower than $109,000 (or $54,000 if married and filing separately). Be sure to consult with your tax professional for applicability to your situation.
How to avoid paying PMI?
PMI is typically required with a conventional mortgage. So, if you are eligible for other types of loans, like a VA loan, you can avoid having to pay for PMI. FHA loans have what’s called a mortgage insurance premium (MIP), which also protects the lender but is not to be confused with PMI, which is for conventional mortgages, not government-backed loans.
Of course, the best way to avoid PMI when purchasing a home is to put at least 20% towards your down payment. Or, when you refinance, if you have built up at least 20% equity in your home.
Contact a Cross Timbers Mortgage loan adviser to learn more about PMI and what it might look like for your next home purchase and refinance.