What is PMI?
Private mortgage insurance (PMI) is a type of loan insurance that some lenders require buyers to have. This insurance protects the lender if the buyer defaults on the loan. PMI is typically required if you have a conventional mortgage loan and your down payment is less than 20% of the home's purchase price.1
Not everyone has enough cash on-hand to make a 20% down payment on a home. When a buyer pays a smaller down payment, the lender assumes more risk by funding a larger loan. PMI helps protect the lender from losing money if a buyer is unable to make mortgage payments and the home goes into foreclosure. The upside for the buyer is that PMI can help you qualify for a mortgage loan with a lower down payment. It's a safety net that allows many buyers to enter the market who otherwise may not have been able to purchase a home.
Tip: The upside of PMI for buyers is that you can qualify for a mortgage loan with a lower down payment.
How much is PMI?
PMI fees will vary according to your location, the amount of your down payment, and your credit score. In general, PMI fees range from 0.3% to 1.5% of the original loan value per year.2 For example, if you buy a $200,000 house and can't afford to put 20% down, you might pay between $600 and $3,000 per year in PMI (or between $50 and $250 per month). Once you have at least 20% equity in your home3 — that is, the outstanding loan balance is no more than 80% of the home's current value — you can request that your lender cancel the PMI requirement. Most buyers only pay PMI for the first five to seven years of the loan.
How to pay for PMI
You pay for PMI as part of your monthly escrow payment. That means in addition to paying your property taxes and homeowner's insurance into your escrow account, you also pay your monthly PMI fee into the escrow account as well. Because the escrow payment is combined with your regular monthly mortgage payment, you only have to make one house payment each month.
How to avoid paying for PMI
You can avoid paying for PMI by making a down payment of at least 20% of the home's purchase price. If that's not possible, there are other ways to avoid PMI. For example, some buyers opt for a "piggyback" loan.4 In this situation, the buyer takes out a second mortgage or home equity loan at the same time as the first mortgage. The first mortgage covers 80% of the purchase price of the home, the "piggyback" loan covers 10%, and the buyer pays the remaining 10% as a down payment (this is also known as an 80-10-10 loan). You can also do a piggyback loan with a larger down payment, so that the first loan covers 80%, the second loan covers 5%, and you pay the remaining 15% down (80-5-15 loan). Talk with your lender about these options. Or, if you don't have a lender, feel free to contact a Synovus mortgage specialist near you.
Important Disclosure Information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
- Consumer Financial Protection Bureau. "What is Private Mortgage Insurance?" 28 July 2017. https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/ Back
- Bankrate. "The Basics of Private Mortgage Insurance, or PMI." Holden Lewis. 28 March 2018. https://www.bankrate.com/finance/mortgages/the-basics-of-private-mortgage-insurance-pmi.aspx Back
Consumer Financial Protection Bureau. "When can I remove private mortgage insurance (PMI) from my loan?" 13 September 2017. https://www.consumerfinance.gov/ask-cfpb/when-can-i-remove-private-mortgage-insurance-pmi-from-my-loan-en-202/Back
- SmartAsset. "The Pros and Cons of a Piggyback Mortgage Loan." Rebecca Lake. 15 May 2018. https://smartasset.com/mortgage/the-pros-and-cons-of-a-piggyback-mortgage-loan Back
People are also reading
Do you have questions or ideas?
Share your thoughts about this article or suggest a topic for a new one