If you make a down payment of less than 20% and take out a conventional mortgage, you’ll most likely have to purchase private mortgage insurance. PMI is meant to protect your lender in the event that you default on your loan.
You will have to pay for private mortgage insurance until you have at least 20% equity. Before you eliminate PMI altogether, you may be able to lower your private mortgage insurance premiums and reduce your total housing costs.
How Your Loan-to-Value Ratio and Credit Score Can Affect Your PMI Premiums
Your loan-to-value ratio is your mortgage balance divided by your home’s current value and converted to a percentage. If you make a small down payment, you will have a high loan-to-value ratio. Your lender will consider you a high risk, forcing you to pay more for PMI than a borrower who makes a larger down payment.
Your credit score also influences the cost of PMI. A borrower with a lower credit score is considered risky and is therefore charged higher PMI premiums than a borrower with a higher credit score.
How to Save Money on PMI
Some private mortgage insurance policies have premiums that are recalculated each year. If you have that type of policy, your PMI premiums will decrease as you pay down your principal balance. Other PMI policies have premiums based on the original loan amount for the first 10 years.
Paying down your mortgage balance can reduce your loan-to-value ratio and may help you lower the amount you spend each month for PMI. You may want to make biweekly rather than monthly payments. If you do that, you’ll make an extra payment each year. Another option is to pay a little extra each month. You can also put money from gifts, bonuses and income tax refunds toward your mortgage.
If you choose any of those options, make sure that your mortgage doesn’t have a prepayment penalty. Inform the lender that you want the additional funds to be applied to your loan’s principal balance.
If your house is currently worth more than it was when you bought it, either because you made home improvements or because the real estate market in your area has improved overall, you may be able to reduce your PMI premiums. An increase in your home’s value will mean that your outstanding mortgage balance is a smaller percentage of your house’s value. A lower loan-to-value ratio can translate to lower PMI premiums.
If you think your home’s value has risen, you can have it reappraised. You may have to pay several hundred dollars for an appraisal, but it can be worth it if you save a significant amount on your monthly private mortgage insurance premiums.
