Buying a home is exciting, but if you’re a first-time homebuyer, you’re likely to encounter a lot of unfamiliar terms and concepts. If you don’t do your research before you start your journey, you may find yourself unprepared for some of the costs of homeownership. One of these is “private mortgage insurance,” or PMI. Many mortgage lenders require you to buy PMI if you make a down payment of less than 20% of the home’s purchase price.
What Is PMI?
PMI protects your lender if you can’t make your payments and end up defaulting on your loan. The monthly premium is typically added to your mortgage payment, but sometimes it’s paid as a one-time, up-front cost at closing. Sometimes, it’s a combination of up-front and monthly payments.
If you’re able to find a mortgage that doesn’t require PMI, it can be a smart money move. You’ll likely have a lower monthly payment and may save hundreds or thousands of dollars. For example, if a traditional loan requires you to pay $50 in PMI each month, that’s $600 each year you’d save by choosing a loan that doesn’t require it.
How Much Does PMI Cost?
The annual cost of PMI varies depending on the amount you borrow, the size of your down payment, your credit score and the insurance company you use. In general, annual costs may run anywhere from 0.3% to 1.5% of the original loan amount. For example, if you take out a $200,000 mortgage, you could pay between $600 and $3,000 a year. A good rule of thumb is the smaller your down payment (and sometimes, the lower your credit score), the higher the premium you’ll pay.
Do I Always Have to Pay PMI?
No. It depends on the lender and the type of mortgage. PMI is most commonly a requirement on conventional mortgages. If you have an FHA loan, you’ll be required to purchase a different type of mortgage insurance, known as a mortgage insurance premium (MIP). And, if you’re using a private lender—like a mortgage lending company, relative or private home seller—your lender may not require PMI. Remember to compare the interest rates these types of lenders offer to what you’d pay with a traditional lender, however—exchanging PMI for a higher interest rate may not serve you in the long run!
There are many other types of mortgages that don’t require PMI. For example, Navy Federal Credit Union offers members certain mortgages that have no PMI requirement, even if you put down less than 20%.
Are There Advantages to Paying PMI?
In some cases, purchasing PMI may help you qualify for a mortgage that you wouldn’t otherwise be able to get. Lenders may be more inclined to offer a mortgage to borrowers who have lower credit scores or are unable to pay 20% down if they pay PMI. You may also be able to get a lower interest rate than you would without it.
How Long Do I Have to Pay PMI?
Under Federal law, if you meet certain conditions, you may be able to request cancellation of PMI once your loan-to-value ratio (LTV) reaches 80% (or approximately once you have 20% equity). PMI may also be automatically terminated by your lender when your LTV reaches 78% or the loan reaches the midpoint of its repayment schedule.
It’s important to note that mortgage insurance can’t be canceled on FHA loans.
Ready to Get Started?
Whether you’ve found the home of your dreams or you’re still exploring the possibilities, Navy Federal has multiple mortgage options that don’t require PMI. Find the one that works best for you.
- Determine whether you’re able to afford a 20% down payment on a home. If you are, there’s no need to worry about PMI!
- If you’re not putting down at least 20%, see if you qualify for different mortgage loans that don’t require PMI, such as a VA loan from Navy Federal.
- For homeowners who already have PMI, consider your LTV ratio. If it’s 80% or less, you may be able to request early cancellation to save yourself money!
This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.