Private mortgage insurance, also referred to as PMI, is usually required when you put less than 20% down on a conventional loan. This insurance provides protection for the lender, not you, in case you are unable to fully pay off your mortgage loan. On average, the annual cost of PMI can rage from 0.50% to 2.50% of the original loan amount. For a $300,000 house, that is $1,500-7,500 per year. It’s important to understand what private mortgage insurance is and how to avoid paying for it considering how significant the cost can be.
Paying for Private Mortgage Insurance
There are several options for paying for private mortgage insurance. You should discuss this with your mortgage lender before you agree to the terms of the mortgage. It’s a good idea to get familiar with the options before you speak to your lender.
Monthly Payments
The most common form of PMI payments is a monthly premium. This amount would be added to your mortgage payment and would be shown on your Loan Estimate and Closing Disclosure before you close on the property. For the previous example with an original loan amount of $300,000, the monthly premium could range from $125-625. This adds up when you are already paying for your mortgage, taxes, insurance and possibly homeowners association fees.
One-time Up-front Payment
Some lenders may offer for you to pay a one-time payment up-front at closing. The downside with this is that you may not be able to receive a refund if you decide to move and sell the house, refinance your mortgage or once you pay off 20% of your loan.
Moreover, you may be offered a combination of a one-time payment and monthly payments. It is best to compare the long term costs of each option. If your lender only gives you one option, make sure you comparison shop for mortgage lenders and know that you are getting a good deal. If it is likely that you will pay off 20% of your loan in a few years, sell your property, or refinance your loan, then you should avoid the one-time premium. Make sure you know the terms of PMI because you should not have to pay for it anymore once you have paid off 20% of your loan.
How To Avoid Paying For Private Mortgage Insurance
The easiest way to avoid having to pay for private mortgage insurance is to put a down payment of 20% or more of the cost of the property. Although this may not be feasible for many people, if you are planning on putting down close to 20% then you should weigh the costs of having to pay PMI or put down the additional amount to get to a 20% down payment and avoid PMI. For some people it may be worth it to save until you can afford a 20% down payment because it will save you money in the long-term. Read our article to learn how to calculate how much house you can afford.
Our Take
While there is a point where you get a return on your investment of private mortgage insurance, we tend to view paying for PMI as a waste of money. If you can avoid it, then you should. When we purchased our home, we were able to put 20% down which not only meant we didn’t have to pay for PMI, but we will also spend less on interest over the course of the loan. By avoiding paying for PMI we saved $125-625 a month (or $1,500-7,500 a year), which is a lot! We view purchasing a home as an investment, so we treat it as such.
Financial freedom begins with good habits.
Rebecca & Tiago, theloadedpig.com