Private mortgage insurance is sometimes a necessary evil with regard to home buying, particularly in a tight economy. Unless you're able to commit a sizable down payment to the purchase, lenders require PMI so they're sure to receive their money even if you default on the mortgage. The more cash you put down on your home, the greater percentage of it you own, which theoretically makes it less likely that you'd risk losing it to foreclosure. Larger down payments give mortgage lenders a greater comfort level. Without it, they want insurance.
Down Payment Limits
The magic number determining when private mortgage insurance is required is usually 20 percent. This is how much you must put down on your home to avoid paying PMI. On a $250,000 home, this equates to a significant amount of money: $50,000. If you don't have that much cash at your disposal, you might still get the loan, but your mortgage payment will be a little higher to account for the PMI payments. Some lenders will waive the PMI requirement if you consent to a higher interest rate instead.
Private mortgage insurance typically costs about .005 percent of the amount you're borrowing. If you put $30,000 down on a $250,000 home rather than $50,000, you must pay PMI of $1,100, or .005 percent of $220,000. It's not a one-time fee; it's a yearly premium. You must pay a little more than $91 per month: $1,100 divided by 12 months. If it takes you 15 years of payments to reach the point where you've contributed 20 percent to the purchase price, you would pay total PMI of $16,500.
In most cases, you must continue paying PMI until you've paid off enough of your principal mortgage balance that your personal investment in the property is at least 20 percent. Even if you don't realize it when your mortgage hits this threshold, the Homeowners Protection Act of 1998 requires lenders to automatically terminate your PMI payments when you achieve a 78 percent loan-to-value ratio. A catch exists, however. Your mortgage payments must be current for at least a year. If you keep track and realize that you now own 80 percent of your home, you can contact your lender and notify the company that it's time to stop the PMI. Realistically, this can take 10 to 15 years, because your mortgage payments are mostly interest in the beginning. They don't whittle away much at your principal balance.
Some mortgages fall outside the provisions of the Homeowners Protection Act. If yours is one of them, you may pay PMI for a considerable time. These mortgages include high-risk loans and some FHA loans. You might have a high-risk mortgage if your credit history was iffy at the time you took out the mortgage, or if you received approval with minimal documentation to support your income.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.