For many first-time homeowners, saving up for a 20 percent down payment on a home can be challenging, especially in cities where housing costs continue to rise faster than wages. That’s where private mortgage insurance (PMI) comes in.
PMI is a type of insurance that protects lenders when buyers put down less than 20 percent on a conventional mortgage. It does not offer protection to the buyer, but it does make homeownership more accessible by allowing smaller down payments. This means you may be able to buy a home sooner without waiting years to save up.
Why PMI Exists
In general, lenders view low down payments as a higher risk. If a borrower defaults on the loan, the lender could lose money. PMI offsets that risk by covering a portion of the lender’s losses. In return, buyers get the opportunity to purchase a home sooner, even if they haven’t saved up a large down payment.
PMI is typically required when the loan-to-value ratio exceeds 80 percent. Once a borrower builds enough equity, which is usually 20 percent, PMI can be canceled.
How Much Does PMI Cost?
The cost of PMI varies based on several factors, including the loan amount, credit score and down payment size. On average, PMI costs between 0.46% and 1.5% of the original loan amount per year.
For example: On a $300,000 mortgage, PMI could cost between $1,380 and $4,500 annually.
That translates to roughly $115 to $375 per month added to your mortgage payment.
Borrowers with higher credit scores tend to pay less, while those with lower scores may see higher premiums.
Bridging the Gap
At VyStar we are working to remove the barriers when it comes to homeownership, especially for our everyday heroes such as teachers, nurses and first responders.
Our Everyday Heroes Mortgage Program reduces costs like PMI and provides closing cost assistance to make homeownership possible for those on the front lines of education, healthcare and public safety.
Learn more about the Everyday Heroes Mortgage Program.