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A down payment on a house is probably one of the most important transactions you will make in your life. While the general rule is to pay 20% down payment, Americans have recently started paying less up front. In 2021, the National Association of Realtors found that the average down payment was 12%, while for homebuyers aged 30 and under, it was just 6%.
Typically, when you buy a home with a conventional mortgage and pay less than 20% of the asking price as a down payment, you will need to pay for private mortgage insurance, commonly known as PMI. As you continue to pay down your mortgage, you can choose to remove the PMI, which can help reduce your monthly mortgage payment.
Below, Select breaks down what you need to know about private mortgage insurance, how it affects your monthly mortgage payments, and how to get it removed.
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Private Mortgage Insurance (PMI) acts as an insurance policy for the lender in case a homeowner, for whatever reason, stops paying their mortgage. Although this additional cost is disclosed to homebuyers in the loan estimate and closing disclosure documents, it is difficult to determine the true cost of a PMI policy because, according to Experianit can vary from 0.2% to 2% of the loan amount per year.
I bought a house in January and chose to pay 5% as a down payment — my PMI is about $90 per month and is just added to my monthly mortgage payment.
According to Consumer Financial Protection Bureauyou can choose to pay for your private mortgage insurance in several ways:
- In the form of a monthly payment, that is to say that each month you will have the cost of your PMI added to your usual mortgage payment
- As an initial premium, which means you will pay the full cost of insurance up front, although there is always a risk that you may not be able to recover the unused premium if you decide to move house or sale
- A combination of monthly payment and upfront premium, meaning you’ll pay part of it at closing, which will lower your monthly payments for the rest
Remember that there are exceptions to the rule, because you are not obligatory have PMI if you pay less than 20% as deposit. Some lenders offer mortgage products that don’t require private mortgage insurance, but you’ll likely have to pay more interest.
If you decide to put less than 20% down and opt for PMI, here are three ways to remove it and reduce your overall costs.
1. Pay off your mortgage enough
Many lenders will simply cancel your PMI payments once you reach a certain milestone in paying off your mortgage, usually around 20%. However, this is usually a manual process, so be sure to contact your repairer for requirements.
Also keep in mind that if your home is paid off at 22%, the Landlord Protection Act forces the lender to cancel the private mortgage insurance without any effort on your part.
2. Refinance your mortgage
Refinancing your mortgage can save you money on interest paid to your lender and lower your monthly mortgage payment. Turns out you can also refinance your way to not paying your PMI.
Note that this generally only works for seasoned homeowners, as many lenders won’t refinance homes when the loan is less than two years old.
If you are considering refinancing, remember that you will have to pay closing costs. Calculate your savings and see what it will really cost to refinance your home.
3. Have your home appraised
House prices have skyrocketed over the past few years, so if you bought a house more than two years ago, it may be worth a lot more than you paid – and this increase in value can help you eliminate your PMI.
For example, if you bought a $400,000 house last year with a 10% down payment, your original debt was $360,000. But if the house has appreciated to $450,000 and you owe $350,000, you are officially over the 20% mark. Be aware that there are costs associated with reappraising your home, so be sure to review and weigh the costs if you decide to do so.
Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.