What is private mortgage insurance?
I love working with first time home buyers, and I talk a lot about how buying a home is actually a lot more attainable that people tend to think. And one of the most common roadblocks people think exists when it comes to home buying is the whole 20% down myth (if you want to hear more about that, I have a whole video about it here: You Don’t Need 20% Down (And Other First Time Home Buyer Myths). It’s completely true that you DON’T need 20% down to buy a home, but I think where that misconception comes from is this: private mortgage insurance.
If you’re asking yourself, “sooo…what is private mortgage insurance?”, I’m breaking it all down below!
What Private Mortgage Insurance Is
Private mortgage insurance (also called PMI) is something you might have to pay when you put down less than 20% of your house’s purchase price (on a conventional loan) or when you have a certain type of loan. Essentially, it’s a type of insurance that is added on to your monthly loan payment to help offset some of your lender’s risk of lending the money to you. Once you’ve reached a certain amount of equity in your home (in general, 20%), you’ll typically be able to stop paying PMI.
How much is private mortgage insurance?
It’s tough to say exactly how much private mortgage insurance is, because a lot of it depends on your specific situation. On average, estimates can range anywhere from .25% to around 2% of your original loan amount.
Let’s break that down: for example, if you bought a $300,000 home, and you were paying 1% in private mortgage insurance, your monthly PMI cost would be $250.
Private Mortgage Insurance Factors
There’s a lot that goes into your PMI amount. Factors like credit can play a big part, as well as your down payment amount and the type of loan you’re using. In general, the lower your down payment amount, the higher your lender may require your PMI to be (because, on their end, a higher loan to value ratio means more risk for them). But again - that doesn’t mean you have to put down 20%, it just means that the smaller your down payment is, the more you may have in PMI.
FHA Loan Mortgage Insurance
If you have an FHA loan, you’ll have something similar to private mortgage insurance, but FHA mortgages have a different structure for their mortgage insurance.
FHA mortgages (which require a minimum down payment of only 3.5%) require either an upfront fee of 1.75% of your loan amount for mortgage insurance, or you can add that fee to your loan amount and add it to your monthly loan payments.
You’ll also have a monthly fee in addition to the upfront premium, which is added to your monthly payments. This fee usually varies from 0.45% to 1.05% of the loan amount per year, and depends heavily on your loan amount, your down payment amount, and your payment term.
Which is Lower: PMI or FHA Mortgage Insurance?
For borrowers who put down less than 20%, you might be wondering whether it’s cheaper to go the private mortgage insurance route (through a conventional loan) or pay FHA mortgage insurance.
The short answer is, it really depends on your credit score.
Because FHA loans are beneficial for borrowers with credit scores below 720, FHA mortgage insurance premiums are usually more affordable for those borrowers compared to private mortgage insurance payments.
If your credit score is higher than 720, private mortgage insurance may be a little cheaper than FHA mortgage insurance. And if your credit score is above 740, PMI will likely be a lot more affordable than FHA mortgage insurance.
However, I always, always recommend checking with a few different lenders to see what options are available to you, and which might be the best fit for you! It’s definitely helpful to shop around and compare rates and terms to see what the best deal is for you.
Just a quick disclaimer: I’m not a lender or mortgage professional and am licensed in real estate in Nevada, so this is based on my own experience and doesn’t constitute legal advice! If you have any questions, I’m happy to direct you to a trusted professional for more specific information!
As always, I’m here for you! If you live in Nevada and have any questions on the home buying process, send me a message to schedule a quick (totally free) buyer’s consultation with me where we’ll go over all of your questions!
And if you’re not in Nevada but still want some guidance on the home buying process, send me a message and I can refer you to a great REALTOR® who can help you out!
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