Private mortgage insurance (PMI) is required when a household’s down payment on the purchase of a property is less than 20 percent of the appraised value or sale price. The purpose of PMI is to protect the lender in the event that the buyer defaults on the loan. While PMI charges can vary, they are typically about one-half of 1 percent of the loan amount.
The price of PMI depends on the loan to value and the borrower’s credit score, according to Bob Walters, chief economist at mortgage lender Quicken Loans based in Detroit. A higher loan to value and a lower credit score will increase PMI fees. For example, a borrower who has a credit score of 680 and secures a $200,000 mortgage with a 90% loan to value may pay approximately $128 per month in PMI. That same borrower would pay $98 per month with a credit score of 750.
PMI makes it possible for those borrowers who can afford the monthly mortgage payment but do not have a sufficient down payment to get into a house of their dreams. While some feel that PMI is a necessary burden, households should keep in mind that paying the added mortgage insurance need not be forever, reports FoxBusiness.
Here are the best options for reducing or removing PMI over the course of the loan term.
- Pay off 20 percent of the total loan amount.
- Order a reappraisal of the home if you believe that the value has gone up since the original assessment.
- Refinance your loan.
- Opt for lender paid mortgage insurance, where the lender agrees to waive PMI in exchange for the borrower paying a higher interest rate over the life of the loan. This alternative makes sense for borrowers who plan to sell their property within the next ten years, since lender paid mortgage insurance cannot be cancelled.
An additional benefit for households making an adjusted gross income of under $109,000 is that they might be able to deduct PMI on their federal tax returns if they secured the loan in 2007 or later for a primary or secondary residence (provided that it is not a rental property), according to HouseLogic. Consult with your mortgage and tax professionals for more information on PMI.