Breaking down PMI

PMI can be a nominal price to pay for being able to secure a home loan with today's mortgage rates.

What is PMI?

For homeowners who put less than 20% down, Private Mortgage Insurance or PMI is an added insurance policy for homeowners that protects the lender if you are unable to pay your mortgage.

It is not the same thing as homeowner's insurance. It's a monthly fee, rolled into your mortgage payment, that’s required if you make a down payment less than 20%. While PMI is an initial added cost, it enables you to buy now and begin building equity versus waiting five to 10 years to build enough savings for a 20% down payment.

While the amount you pay for PMI can vary, you can expect to pay approximately between $30 and $70 per month for every $100,000 borrowed.

PMI in action

A $200,000 HOME: 5% DOWN VS. 20% DOWN

  5% down payment 20% down payment
Down Payment $10,000 $40,000
Loan Amount $190,000 $160,000
Mortgage Type 30-year fixed-rate 30-year fixed-rate
Interest Rate 4.5% 4.5%
Monthly Mortgage Payment (Principal and Interest) $962.70 $810.70
PMI $80.75* $0
Total Monthly Payment (Excluding Property Taxes, Insurance) $1,043.45** $810.70**

*Assuming an insurance rate of 0.51%; this cost can be cancelled from your payment once you reach 20% equity in your home for conventional loans, but not FHA loans

**Does not include property tax and homeowner’s insurance payments

PMI isn't forever

Once you've built equity of 20% in your home, you can cancel your PMI and remove that expense from your monthly payment. If you're current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original appraised value of your home. If you choose to use PMI, be sure to talk with your lender about these specific details of your policy.

Talk with your lender about what down payment makes the most sense for your financial situation. Remember, you have options!