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. One of those is private mortgage insurance, or PMI. With many mortgage lenders and types of mortgages, you must pay PMI if you make a down payment of less than 20 percent of the home’s purchase price.
What is PMI?
PMI is arranged by the mortgage lender and provided by a private insurance company, with the intention of protecting the lender should the homebuyer fall behind on payments. If you’re able to choose a mortgage that doesn’t require PMI, it can be a smart move that could save you hundreds or even thousands of dollars per year. Fortunately, Navy Federal offers several different mortgages that don’t require PMI.
Do I always have to pay PMI if I put less than 20 percent down?
No. It depends on the lender and the type of mortgage (PMI is most commonly a requirement on conventional mortgages). FHA loans have a similar type of mortgage insurance that’s purchased from the federal government rather than a private insurance company. There are many other types of mortgages that don’t require PMI. For example, at Navy Federal Credit Union, VA Loans, Military Choice, Conventional Fixed-Rate, 100% Financing HomeBuyers Choice and some Adjustable-Rate Mortgages (ARMs) have no PMI requirement with less than 20 percent down.
How much does PMI cost?
PMI premiums vary depending on the size of your down payment, your credit score and the insurance company. They may run from 0.3 percent to 1.5 percent of the original loan amount, per year. On a $200,000 mortgage, that's $600 to $3,000 a year. Usually, the smaller your down payment and/or the lower your credit score, the higher the premiums for PMI.
Are there any advantages to paying PMI?
In some cases, PMI may help you qualify for a mortgage that you wouldn’t otherwise be able to get. Also, there’s sometimes a trade-off. If you pay PMI, you qualify for a lower interest rate on your mortgage; if you don’t pay PMI, your interest rate is higher. Your lender can help you run the numbers to see which option is most beneficial for you based on how long you plan to stay in your home and other factors.
If I pay PMI, can I cancel it at some point?
You can request to cancel PMI when you’ve paid down the principal on your mortgage to the point where you have 20 percent equity in your home. This is referred to as having a loan-to-value ratio of 80 percent—the balance still owed on your mortgage is equal to 80 percent of the home’s original value. Your lender should automatically cancel PMI when your loan balance drops to 78 percent of the home’s original value. It’s important to note that mortgage insurance can’t be canceled on FHA loans.
Does paying PMI make sense for me?
For many Navy Federal members, there are alternatives to choosing PMI. Making sure you get the most out of your mortgage is our goal. Explore your mortgage options at Navy Federal to see what works for you.