PMI stands for private mortgage insurance, and it’s a type of insurance that lenders require you to pay if you put less than 20% down on your home purchase. PMI protects the lender in case you default on your loan, but it doesn’t benefit you at all. In fact, it can cost you thousands of dollars over the life of your loan.
According to the Mortgage Bankers Association, the average loan size for a purchase mortgage in 2020 was $333,900. Assuming a 10% down payment and a PMI rate of 0.5%, that means you would pay $125.96 per month for PMI, or $1,511.52 per year. Over 30 years, that adds up to $45,345.60! That’s a lot of money that could be used for other things, like home improvements, savings, or investments.
So how can you avoid paying PMI? The simplest way is to save up enough money for a 20% down payment, which will also lower your interest rate and monthly payment. Another option is to refinance your loan once you have enough equity in your home, which means your home value has increased or your loan balance has decreased enough to reach 20% equity. A third option is to get a piggyback loan, which is a second mortgage that covers part of your down payment and eliminates PMI. However, this option may have higher interest rates and fees than a single loan.
PMI is a common expense for many homeowners, but it doesn’t have to be. By understanding what PMI is and how to avoid it, you can save yourself a lot of money and hassle in the long run. If you need help with finding the best mortgage option for your situation, feel free to reach out to us. We’re always happy to help!