Private mortgage insurance, known as PMI, is generally required if your down payment is less than 20% of the cost of the home. We offer insight into what PMI is, how to budget for it when purchasing a home, insurance changes to remember, how to avoid PMI and what you can do to stop paying PMI.
What to know about private mortgage insurance
What is PMI?
Lenders consider you to carry more risk if you make a down payment of less than 20% of your home's cost. For borrowers with relatively little equity in their home, lenders require private mortgage insurance, or PMI, to protect them if you fail to make payments on your loan. If you can't afford a 20% down payment, you're not alone.
Here is some average PMI information from 2017 — 2019:
- 18.7% of conventional mortgages required PMI
- Loans with PMI averaged $236,100
- The average value of a home that required a PMI loan was $280,260
How much does PMI cost?
If your down payment will be less than 20%, PMI premium payments will likely be part of your monthly loan payment amounts for a while. The amount you'll pay depends on the size of your loan, the amount of your down payment and your credit score.
- Annual premium range for PMI as of September 2020: 0.58% to 1.86%
- Example: $235,000 loan - 0.75% premium = $1,762.50 per year or an extra $146.88 per month
Getting rid of PMI
Once the principal outstanding on your loan reaches 80% of your home's value, you can request that your bank cancel PMI under these conditions:
- You request cancellation in writing
- You have made your payments on time and the loan is current
- You haven't used the home to secure additional loans, like a second mortgage
If you are current on your payments, your lender may automatically cancel your PMI when the remaining loan principal reaches 78% of your home's original value.
For more information on lending and more, visit statefarm.com/simple-insights.