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What is a Private Mortgage Insurance (PMI)?

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A Private Mortgage Insurance, or PMI, is a type of insurance that protects the lender (not you) if you default on your loan. All lenders require that you pay for PMI with less than 20% down payment on most loans. You see this as an extra cost on your monthly mortgage payments. Typically, you can remove the PMI once your loan balance is less than 80% of the original purchase price.

Frequently Asked Questions

How Much Does PMI Cost?

Your lender will be able to provide you with the exact amount, but your Realtor can also give you an estimate. For example, for a $600k home in Fairfax County. Using a 3% 30-year fixed Conventional Loan:

  • At 20% down, there is no PMI, and the Principal and Interest costs are $2,023.70 per month.
  • At 10% down, the PMI is $279.00 per month, and the Principal and Interest costs are $2,276.66 per month.
  • At 5% down, the PMI is $446.50 per month, and the Principal and Interest costs are $2,402.14 per month.

How Do I Make PMI Payments?

The PMI payments are included in your monthly mortgage payments. You also have the option of paying for your mortgage insurance upfront, which will cost your closing costs and your interest rate to go up. However, the benefit is your tax deduction from the closing costs and increased interest also go up.

Is It Bad to Pay PMI?

Paying PMI is not necessarily bad if you ended up spending less per month on your home than if you would have paid in rent. For example, if your entire monthly mortgage payments amount is $2,500 and you’d have to pay $2,800 to rent a similar property, you are better off buying a house and having to pay the PMI.

In general, paying PMI is not great financially because (1) the monthly fee you pay doesn’t contribute to your debt paydown or equity growth, and (2) the amount you paid each year is not tax-deductible. It is purely an expense.

Do VA Loans Have PMI?

No, VA borrowers do not have to pay PMI. However, VA loan borrowers have to pay a funding fee, which is added to the loan balance.

For 2020, the VA funding fees are as follow:

  • First-use:
    • For 0% down loans, the funding fee is 2.3% of the loan amount.
    • For 5% to 9.9% down loans, the funding fee is 1.65% of the loan amount.
    • For 10% or more down loans, the funding fee is 1.4% of the loan amount.
  • Subsequent-use:
    • For 0% down loans, the funding fee is 3.6% of the loan amount.
    • For 5% to 9.9% down loans, the funding fee is 1.65% of the loan amount.
    • For 10% or more down loans, the funding fee is 1.4% of the loan amount.

The funding fee is waived if you meet one of the eligibility criteria:

  • You are entitled to or are receiving compensation for a service-connected disability.
  • You are an active-duty service member who has received a Purple Heart.
  • You are a surviving spouse of a veteran who died while serving or from a service-connected disability.

Do FHA Loans Have PMI?

Yes, for FHA Loans, it is called Mortgage Insurance Premium (MIP). For the same house above, your MIP on a 3.5% down payment FHA loan is $410.13 per month.

One caveat about FHA MIP is that it cannot be canceled like a regular PMI. The only way to get rid of your MIP is to refinance your mortgage.

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