The cost of private mortgage insurance varies, but there’s a simple rule: The less money you put down, the more you’ll pay in PMI premiums. If, for example, your home is valued at $400,000, and the outstanding balance on your mortgage principal hits $312,000 - meaning you’ve paid $88,000 of your principal - then you no longer have to pay PMI. It’s not because they’re nice, rather because it’s required by the Homeowners Protection Act. Lenders will stop charging PMI premiums once you’ve accumulated 22% of equity in your home.
It’s another way for the lender to protect itself against the worst-case scenario of default on the loan.ĭon’t worry, you don’t have to pay PMI forever. Why would the lender need insurance? Because there’s a chance that you won’t be able to pay back the loan, and if you’re making a relatively small down payment of anything less than 20% of the purchase price then you represent a greater risk on the lender’s books.
PMI stands for private mortgage insurance, and this is a type of insurance that protects the lender that’s helping you come up with the cash to buy a home.
