When you are buying a home you will quickly learn that there are a wide array of terms and acronyms with which you need to be familiar. Learning a whole new mortgage ‘language’ can feel daunting but it is important to fully understand what you are doing when you invest in a new home. And PMI is one of those terms that is particularly important to know, particularly if you plan to have a down payment on your new home that is less than 20% because you will be directly impacted by PMI.
PMI stands for Private Mortgage Insurance and it is an additional fee that will be a component of your normal monthly mortgage payment if you put down less than 20%. Private Mortgage Insurance is essentially a protection for your mortgage lender so that, should you default on your loan, they will not experience as significant of a financial loss. So how much is PMI and will it dramatically impact your monthly mortgage payment (thus potentially impacting how much you can afford?)? Bankrate explains what to expect when it comes to PMI payments, “PMI fees vary from around 0.3 percent to about 1.5 percent of the original loan amount per year, depending on the size of the down payment and the borrower’s credit score. Mortgage insurance paid in 2017 is tax-deductible, but it remains to be seen whether Congress will renew the deduction for 2018. The Trump administration is overhauling the tax code.”
The good news about PMI is that eventually it does go away. Once you have accumulated enough equity in your home your PMI should simply go away. But, you may need to speak to your mortgage lender about getting rid of your PMI if you are not certain whether or not you have reached the right level of home equity. Your home’s value needs to reach 80% of the original loan value for your PMI to go away so you may need to have your home appraised. It is important to note, however, that if you have an FHA, you may be required to have PMI for the life of the loan. Speak to your mortgage lender to learn more about how PMI works and whether or not you will have to pay PMI to have a comprehensive understanding of your monthly mortgage payment.