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If you’re buying a home with a conventional loan and a low down payment, you may be expected to pay an additional cost: private mortgage insurance, or PMI. PMI isn’t insurance for you or your home, but instead protects your mortgage lender in the event that you stop making payments on your home loan. Your lender may require you to pay for PMI – in addition to your mortgage payment — if your down payment is less than 20% of your home’s sales price or appraised value.
Your mortgage lender could have a calculator that makes this process simple, or they can do the calculation for you. If you wish to calculate PMI on your own, however, the process is not difficult.
First, determine your annual mortgage insurance by multiplying the loan amount by the insurance rate. So, for example, if your loan total is $300,000 and your insurance rate is .0050, your annual mortgage insurance payment would be 300,000 x .0050 or $1,500.
Next, to find what your monthly PMI payment would be, divide your annual PMI payment amount by 12, so $1,500 / 12 = $125. Just add that amount to your monthly mortgage principal and interest plus taxes and you’ll know what your monthly house payment will be.
For a conventional loan, you don’t have to pay PMI for the full length of your mortgage. On the date that you’re scheduled to have paid the mortgage down to 78% of the home’s value when you bought it, the lender is supposed to automatically cancel the PMI – considering that you’ve met the conditions specified in your contract. You can find this date on the PMI disclosure form included with your mortgage paperwork. If you are unable to find this form, be sure to contact your mortgage lender.
You can request that your lender cancels your PMI earlier if you have made additional mortgage payments and you’ve paid the loan down to 80% of your home’s original value ahead of the scheduled date.
To cancel private mortgage insurance, you must put your request in writing and be current on your payments. However, a lender may ask you to certify that you haven’t taken out a second mortgage and require a home appraisal. A lender may reject your request for early removal.
Be sure to stay current on your combined mortgage and PMI payments. If you fall behind on payments, cancellation of your PMI may be delayed until you are caught up on your payments.
A mortgage lender also must terminate your private mortgage insurance when you reach the midpoint of your loan’s amortization schedule. In a 30-year mortgage, this would occur after 15 years.
Lender-paid mortgage insurance is an alternative to paying private mortgage insurance. With lender-paid mortgage insurance, a lender will pay your mortgage insurance premium upfront and pass the cost along to you with a higher interest rate on your home loan.
Your monthly payment with lender-paid mortgage insurance may be lower than what you would pay with PMI. But unlike PMI, lender-paid mortgage insurance cannot be canceled or terminated and instead continues for the life of the loan.
If you plan to stay in a home for 10 or more years and you’ve chosen a longer-term mortgage, you may want to consider private mortgage insurance. But if you plan to move or refinance within 10 years and you’ve chosen a shorter-term mortgage, lender-paid mortgage insurance may be a more affordable option for you.
Ask your lender about PMI and lender-paid mortgage insurance when buying your home. Consider your future plans and crunch the numbers carefully before choosing either insurance option.
Before you buy a home, make sure you know where you stand by checking your credit reports and credit scores (you can start by pulling your free credit report snapshot on Credit.com). Using this calculator, you can get an idea of how much house you can afford so that you stay within your target range.
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