Why PMI?

When a bank or other mortgage lender lends money to a homebuyer, the company is taking an enormous financial risk. The company assumes this risk because it stands to profit from the interest a buyer will pay over the course of the loan, but, with every opportunity for profit comes a risk for loss.

What if the buyer loses a job? What if he or she dies? What if the buyer just stops paying on the mortgage? In any of these events, the mortgage company will lose both the money that was lent — and the interest.

Bill Gates made a splash in 2017 when he bought $520 million worth of U.S. farmland, and he’s continued to invest since. What’s in it for Gates?

Read More

How much is PMI?

The mortgage company requires the buyer to pay PMI in order to protect itself. PMI is insurance to help the lender recover if the buyer defaults on the loan. The buyer is required to pay monthly premiums based on the cost of the home, typically up to $200 per month.

PMI is tacked onto the monthly mortgage payment. If a homeowner who pays $800 toward interest and principal every month has PMI of $150, the monthly mortgage bill will be $950.

How to escape it

Escape
Akif Oztoprak / Shutterstock
You can make a break from PMI by making a larger mortgage payment.

Pure and simple, you're required to pay PMI if you make a down payment that's on the small side when you buy a home.

To avoid PMI premiums, make a higher down payment. Most conventional mortgage companies require a down payment of at least 20% of the cost of the house in order to waive the PMI requirement. Companies reason that a person with enough assets to make a bigger investment when buying a home is less likely to default on the loan.

Note that some non-conventional loans never have PMI. For example, VA loans do not require any down payment and do not charge PMI.

Use our mortgage calculator below to see what your payments look like with 20% down:

It seems like a tricky time to get into real estate, and being a landlord isn't as passive as you think. Look at these low-stress options instead.

Read More

Other things you'll want to know

In some cases, a buyer will get separate loans to cover the cost of the home and the cost of down payment, thus avoiding PMI. This type of borrowing scheme is called a piggyback loan, but it has its own risks and benefits.

Some loans offer options where the lender will pay the PMI, rather than the buyer.

If you're already a homeowner paying PMI, rest assured it will go away when you pay off enough of the loan.

PMI will increase monthly mortgage payments, but it should not be so expensive as to make a home unaffordable. Mortgage bankers can answer specific questions about PMI.

Are you thinking about saving? Well, stop thinking about it!

Take the change out of your piggy bank and make it work for you.

Acorns is a financial wellness tool that automatically rounds up your card purchases to the nearest dollar and puts those savings into an investment account. It takes the worrying out of investing and matches you with one of five investment portfolios.

Take five minutes to sign up for Acorns today and collect a $10 bonus.

About the Author

Doug Whiteman

Doug Whiteman

Former Editor-in-Chief

Doug Whiteman was formerly the editor-in-chief of MoneyWise. He has been quoted by The Wall Street Journal, USA Today and CNBC.com and has been interviewed on Fox Business, CBS Radio and the syndicated TV show "First Business."

What to Read Next

Looking For Passive Income? There's One Option Right Below Your Feet

One company’s innovative approach makes farmland investing easier and more accessible.

Want to Earn Big Returns Without the Shaky Stock Market? Try Art

Art investment is no longer reserved for the wealthy

How to Get a Mortgage: Follow These 9 Steps

It's a lengthy, complicated process, so just keep your eyes on the prize: your new home.

Disclaimer

The content provided on MoneyWise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.