Homebuyers

How Much Does PMI Cost Homebuyers and Is It Worth It?

Private mortgage insurance, often known as PMI, has a reputation as something people may want to avoid when purchasing a home.

But for buyers who don’t have a 20% down payment or want to keep some cash reserves in case of emergencies, PMI has its advantages. 

For starters, it can help you get into a property and start building equity faster, instead of paying a landlord.

“PMI isn’t the boogeyman,” said Stephen Moye, a San Diego-based sales manager at New American Funding. “It’s a tool that helps to expand homeownership.”

So, what is PMI? Here’s what you need to know about private mortgage insurance if you’re planning on buying a home.

What is PMI and when is it required?

PMI is generally required by lenders when a homebuyer has less than a 20% down payment. This is because these buyers are generally viewed as riskier borrowers than those who put down more. So, the insurance compensates the lenders for taking on that risk.

The good news for buyers just shy of 20% is PMI isn’t a one-size-fits-all amount.

“The closer you get to a 20% down payment, the cheaper PMI will become,” said Ryan Schaefer, a San Diego-based loan consultant at New American Funding.

On Conventional loans, PMI is generally removed once you have 20% equity in your property.

However, the mortgage insurance rules are different for Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans.

Neither of these government-backed loans use private mortgage insurance. Rather, both FHA and USDA loans require mortgage insurance as part of the loan itself.

FHA loans carry mortgage insurance premiums (MIP) for the first 11 years of the loan if buyers put down at least 10% at closing. However, if you put down less than 10%, the insurance cannot be removed unless you refinance into a new type of loan.

Mortgage insurance is also permanent for USDA loans.

How much does PMI cost?

Homebuyers with PMI can generally expect to pay between $30 and $70 a month for every $100,000 they borrow, according to Freddie Mac. The exact amount will depend on how much you borrowed, the size of your down payment, your credit score, and other factors.

For a $300,000 mortgage, that adds up to $90 to $210 a month.

How much is mortgage insurance on an FHA loan?

On an FHA loan, mortgage insurance requires an upfront payment of 1.75% of the base loan amount. Often, that’s rolled into the loan balance.

For a $400,000 mortgage, for instance, that equals $7,000.

Buyers will also need to pay a monthly mortgage insurance premium. That’s generally between 0.5% and 0.55% of the loan size for 30-year loans. However, that amount can go up to 0.75% for larger loans, depending on how much you put down.

How much is mortgage insurance on a USDA loan?

USDA loans don’t require mortgage insurance in the way that a Conventional or FHA loan does. Instead, borrowers must pay a 1% fee upfront when they close on the home.

Each year thereafter, the annual fee is 0.35% of the remaining balance for the life of the loan. That charge is rolled into the monthly mortgage payment.

How to get rid of mortgage insurance 

The ability to remove mortgage insurance from your mortgage payments depends on which loan you use.  

• Conventional loans: With a Conventional loan, most homeowners will be able to get rid of PMI once they achieve 20% equity in their properties. This happens over time by making your mortgage payments and home price appreciation. Once you reach this threshold, you will typically need a professional appraisal to have it removed. 

• FHA loan: Typically, homebuyers with an FHA loan will pay MIP for the life of the loan if they put down less than 10% when they purchased the property. However, if the homebuyer made a 10% or higher down payment, MIP will drop off after 11 years. Homebuyers can also refinance their FHA loan into a Conventional loan when they have 20% equity in the property to remove MIP. 

• USDA loan: With a USDA loan, homebuyers will pay the 0.35% insurance premium on their loan balance unless they refinance into a Conventional loan.

Should homebuyers pay PMI?

The decision to pay PMI comes down to each homebuyer’s individual situation.

Schaefer had a client who worked hard to come up with a 20% down payment to avoid PMI only to spend more than $144,000 in rent while saving.

“He would have been a much better place taking the PMI on a home in the area and letting the appreciation do the work instead of having to save the money himself,” said Schaefer.

Stephen Moye NMLS # 268619

Ryan Schaefer NMLS # 847481