As a homebuyer ready to take the plunge, a mortgage lender will typically require a minimum down payment of 20% of the home’s purchase price. As a borrower, if you cannot meet that minimum requirement, a lender will view the loan as a riskier investment and therefore require Private Mortgage Insurance, also known as PMI.
What Is PMI?
PMI is insurance that protects the lender — not you — in the event that you default on the loan. It does not provide you with any coverage or benefit. PMI is typically required on conventional loans when the buyer makes a down payment of less than 20%. The cost of PMI varies but generally runs 0.5% to 1.5% of the original loan amount per year, added to your monthly mortgage payment.
Does PMI Have Any Upside for Buyers?
Indirectly, yes. PMI allows buyers who don’t have a 20% down payment to purchase a home sooner, rather than waiting years to save up. Given that home prices in Sacramento and California generally appreciate over time, buying sooner — even with PMI — can be financially advantageous compared to renting while you save for a larger down payment.
How Do You Get Rid of PMI?
Once you reach 20% equity in your home — either through paying down your mortgage or through home value appreciation — you can request that your lender cancel PMI. Under the Homeowners Protection Act, lenders are required to automatically cancel PMI when your loan-to-value ratio reaches 78% based on your original purchase price and payment schedule.
Alternatives to PMI
Some lenders offer “piggyback” loans (a combination of an 80% first mortgage and a smaller second mortgage) to avoid PMI. Others may offer lender-paid PMI in exchange for a slightly higher interest rate. FHA loans have their own mortgage insurance that works differently from PMI. Discuss your options with your lender to find the best structure for your situation.
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