PMI - Private Mortgage Insurance
What is PMI?
Private mortgage insurance (PMI), also called mortgage insurance, is what borrowers must pay on each mortgage payment if they didn't make a 20 percent down payment toward their home loan. The insurance protects the lender financially in case the borrower fails to repay.
How Much is PMI?
Lenders require potential home buyers to pay for PMI if they don't put at least 20% down in cash toward a home when they apply for a home loan. For example, let's say you want to take out a mortgage to buy a $200,000 home. If you don't pay at least $40,000 in cash when closing on the mortgage (i.e. put 20% down), the lender will ask that you pay for PMI as part of your mortgage payment.
The cost of PMI can be 0.5% to 1% of the mortgage amount (i.e. $1,000 to $2,000 per year on a $200,000 mortgage), but the exact amount will depend on the lender. PMI can either be paid separately each month or included in a borrower's monthly mortgage payment. PMI goes away after the homeowner's equity reaches 20% of the home's original appraisal value (more on that below).
How to Get Rid of PMI
PMI goes away after your equity reaches 20% of your home's original appraisal value. Put another way, the amount you owe on your mortgage must equal 80% or less of your home's appraised value when you first took out the mortgage to get rid of PMI.
If you're currently paying PMI with your mortgage payment, you could pay extra toward the principal to more quickly get your equity up to the 20% mark.
For example, let's say you put down $20,000 in cash toward a $200,000 home (10% down), and took out a $180,000 mortgage to finance the rest. As you make payments toward the principal each month, your equity in your home will build and the amount you owe will go down.
Once the amount you owe on your mortgage falls to $160,000 or less, your mortgage amount will equal 80% or less of the original appraisal value ($160,000 / $200,000 = 80%). This usually satisfies lender's 20% equity requirement and gets rid of your PMI obligations, lowering your monthly mortgage costs.
You may also get rid of PMI by refinancing. If your home's value has appreciated considerably, you could refinance into a mortgage with a lower interest rate as the new lender may refigure your equity to be above the 20% equity threshold.
[Learn more secrets in 4 Savings Tips Mortgage Lenders Don't Want You to Know]
How to Avoid PMI
If you're looking for a home and don't want to pay PMI, you could consider making your home budget five times what you have in down payment cash as that would satisfy lenders' 20% equity requirement.
So if you have $40,000 in cash for a home after considering closing costs, you could look for homes priced under $200,000 ($40,000 x 5) to avoid paying PMI. Talk to your lender or mortgage broker for help on this.
Is PMI Tax Deductible After 2018?
This deduction expired at the end of 2017, so it is no longer deductible for tax year 2018 and beyond unless there are changes made to the tax code.
If you paid PMI after December 31, 2012 and before January 1, 2017 and your mortgage is to purchase your primary residence, you may qualify to deduct PMI payments from your taxable income if you itemize your deductions.
Beyond those requirements, there's an income limit as well. Married households meeting the above requirements can fully deduct their PMI payments if their adjusted gross income (AGI) was less than $100,000 for the 2018 tax year ($50,000 for married filing separately).
The deduction is reduced by 10% for every $1,000 in AGI above that amount and you are not able to deduct anything if your AGI is above $109,000 ($54,500 if married filing separately).
More Great Reading on this Topic:
- 4 Savings Tips Mortgage Lenders Don't Want You to Know
- The Ultimate Home Loan Guide
- 3 Ways to Pay Off Your Mortgage Up to 15 Years Early