Buying a home is so exciting, but if you’re a first-time homebuyer, you’re likely to encounter a lot of unfamiliar terms and concepts. One of these is “private mortgage insurance,” or PMI. Many mortgage lenders often 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 default 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—or 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.
How much does PMI cost?
The costs vary, depending on the amount you borrow, the size of your down payment, your credit score and the insurance company. In general, annual costs may run anywhere from 0.3% to 1.5% of the original loan amount. So if, for example, 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/or the lower your credit score), the higher the premium you’ll pay.
Do I always have to pay PMI if I put less than 20% down?
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. One thing to keep in mind is it’s a good idea to compare the interest rates these types of lenders offer to what you’d pay with a traditional lender.
There are many other types of mortgages that don’t require PMI. For example, Navy Federal Credit Union offers its members certain mortgages that have no PMI requirement, even if you put less than 20% down.
Are there any 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. For example, with PMI protection, lenders may be more inclined to offer a mortgage to borrowers who have lower credit scores or are unable to pay 20% down. You also may be able to get a lower interest rate than you would without it.
How long do I have to pay PMI, and can I cancel it at some point?
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 exploring the possibilities, Navy Federal has multiple mortgage options that don’t require PMI. Find the one that would work best for you.