If you’re thinking of taking out a conventional mortgage, but don’t have a 20% down payment, there’s good news for you: you can get a mortgage with less than 20% down.
It’s important to know, though, that private mortgage insurance (PMI) is often a requirement for homebuyers who are paying less than 20% down on a conventional loan.
For many people, the cost of PMI is worth the benefits of owning a home. Understanding the costs associated with PMI will help homebuyers be prepared for their upcoming mortgage expenses.
So, how much does PMI cost? Fees vary, depending on the down payment amount and the homebuyer’s credit score. If you have a 15% down payment and an excellent credit score, for instance, your PMI costs will most likely be less than a homebuyer who has only a 5% down payment and an average credit score.
Typically, PMI fees range from 0.3 to 1.5% of the original loan amount, per year. So, for example, if you take out a $300,000 mortgage, your PMI costs may range from $900 to $4,500 per year (or roughly $75 to $375 per month). Most PMI is paid monthly by the borrower, but there are other options.
You may be thinking, “Why would I want to pay that?”
Because interest rates are low, historically speaking, it may be financially beneficial to obtain a mortgage now, while you can lock in a lower rate. Even with the additional cost of PMI each month, this could still be more affordable than waiting several years to save for a 20% down payment and ending up with a higher mortgage interest rate.
As far as the actual act of paying for your PMI, you won’t have to worry about doing any of the work. In most cases, you will pay for PMI as part of your total loan payment, which also includes the mortgage principal, interest, and taxes. Your lender will take care of getting the money to the private mortgage insurer.
At the end of the day, it’s all about weighing the pros and cons of PMI. Speaking with an experienced loan professional will help you learn more about your options. Regardless of your decision, it’s never too early to begin planning for homeownership.