![]() Sure, you get a roof over your head, but you’re not reaping any of the benefits of actually owning the place. If you keep paying rent, that’s $2,000 every month that goes to your landlord. ![]() Let’s say, for example, you’re paying $2,000 a month in rent. While no one likes paying additional fees, the trade-off is that you can start building equity much earlier instead of delaying your purchase while trying to save up for that magic 20% down payment (which can feel nearly impossible in many housing markets). If you’re taking out a conventional loan and can’t afford to make a down payment of 20% of the purchase price, you’ll likely pay for private mortgage insurance. Is it worth it to consider a loan that charges PMI? Additionally, there are certain loans that don’t charge PMI, such as VA and USDA loans. With that in mind, don’t be surprised if the PMI on an ARM is a bit higher to compensate for the heightened risk. With an ARM, your payment could wind up being higher after the introductory period - which can spell trouble for your overall budget and ability to make ends meet. Your loan type: Lenders look at a fixed-rate mortgage a bit differently than an adjustable-rate mortgage, or ARM. On a $300,000 loan, that can be as low as $600 and as high as $4,500 per year. A borrower with fair credit - 620 to 660 - might wind up with a premium of 0.75% to 1.5% of the loan. For example, the Industrial Federal Credit Union shows that someone with excellent credit of 740 or higher might have a PMI payment of just 0.2% to 0.3% of the total loan. ![]() Your credit score: Just as it’ll play a huge role in determining the interest rate a lender will offer you, your credit score will also play a big influence in your PMI. For example, a 97% LTV indicates that you’re only putting down 3% of the purchase price, which means you’ll pay a fairly high PMI premium. The higher your LTV, the more money you’ll pay for PMI. Simply put, lenders appreciate seeing a borrower who can put more money down upfront because it’s less risky to them. Your loan-to-value (LTV) ratio: Commonly known simply as LTV, your initial loan-to-value ratio is based on your down payment. If you’re trying to get a sense of how much you may wind up paying for PMI, it’s important to understand these three key factors. An example of PMIĬonsider this hypothetical breakdown from Freddie Mac’s PMI calculator, based on a home valued at $350,000 with a 30-year mortgage at 7% interest: So, if you borrow $300,000, your PMI might add somewhere between $90 to $210 to your monthly payment. Freddie Mac, for example, estimates that the typical borrower should expect to budget somewhere between $30 and $70 per month per $100,000. 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.
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